Characteristics and specificities of the US dollar or USD :
In order to trade the USD/JPY currency pair more effectively, it is of course necessary to be familiar with the specifics of the two currencies that make up the pair. Let's start here with the US dollar or USD whose evolution is most often the result of a known safe haven status but also of the level of US growth or the decisions and policies of the Fed.
The safe-haven value of the US dollar is due to the fact that this currency has managed to emerge from various economic and financial crises over time. Of course, the fact that the United States is still often regarded as the world's leading economic power is not without reason either. However, the dollar's role as a safe haven has become less and less asserted in recent years, although it remains to be taken into consideration.
Thus, when the market experiences periods of significant risk aversion, the US dollar tends to rise, as was the case during the 2007/2008 crisis.
Of course, the level and health of the U.S. economy is also important in your analysis of this value since it has a strong influence on the price of this currency. The U.S. economy is particularly responsive to business cycles. The U.S. economy is particularly responsive to economic cycles, with very strong growth in periods of recovery and expansion and a very weak economy in periods of recession.
Finally, the Federal Reserve or Fed and its various interventions and decisions also have an undeniable weight on the price of this value and you must therefore take into account the various measures taken by this body, notably to revive the American economy with the reductions or increases in key rates or even the Quantitative Easing or QE programmes which act by creating high inflation, which is of course not without consequences on the value of the American dollar.
Characteristics and specificities of the Japanese Yen :
Let's now move on to the second currency of this cross, the Yen, and the elements that most influence its value.
The first thing to know about the Yen is that this currency has a safe-haven status in that it loses value when the world market is growing and gains points in a crisis. The fact that the Yen is used for Carry Trade strategies is another element that makes it a safe haven in the markets.
Indeed, since the beginning of the 21st century, the BoJ, or Central Bank of Japan, has been pursuing a policy of key rates at 0% in order to avoid deflation and excessively low growth. This decision of course has a direct influence on the value of the Yen, since this currency can then be used to finance the purchase of other currencies with higher interest rates. Remember that when you sell a currency on the Forex market, you pay this interest rate and, in the opposite situation, when you buy a currency, you receive this interest rate. Therefore the USD/JPY has long been influenced by the Carry Trade strategy used by many investors. But since 2009, this strategy has been used less and less in view of the general fall in interest rates of other central banks.
As the value of the Yen has little exposure to the economic health of that country, it is therefore primarily the safe-haven status of that currency that you should consider when taking positions in the USD/JPY. In fact, we note that Japan has, in the past, gone through many economic crises from which it has emerged without any problems and that the Yen remains a currency widely used in international trade. But it is also above all Japan's debt that makes the Yen a refuge currency par excellence. In fact, despite the fact that Japan has the largest debt in the world, with a level of debt of over 225% of GDP, it holds a large part of its own debt, over 90%. Japan does not therefore suffer from the vagaries of the financial market for its refinancing, even though the debt of other countries in the world is literally skyrocketing, particularly in the developed countries. This can easily be seen on historical stock market graphs with the subprime crisis of 2008 and the financial crisis that led to massive purchases of Yen. This scenario was then repeated in 2011 with the debt crisis. However, as we quickly said above, when the world economy is doing well, the Yen tends to lose value. It is therefore fairly easy to anticipate future changes in the USD/JPY rate based on the level of global growth and possible economic and financial crises.
Finally and unlike most other currencies, the Yen is not really influenced by the Japanese economy. Indeed, the trade balance of this country, which is both a major exporter and a major importer, shows a jagged evolution, sometimes positive and sometimes negative, depending on the level of exports and imports. However, there is a correlation between the value of the Yen and the Japanese economy, since it is the competitiveness of this currency against other world currencies that will make imports or exports more or less advantageous and make the country more or less competitive.
As you will have understood, the Japanese economy is not a prime influencing factor if you wish to invest in this currency pair. Furthermore, it is noticeable that the growth of the Japanese economy has remained relatively weak over the last few decades due to persistent deflation. The Bank of Japan's efforts to reverse this trend will be monitored, in particular through quantitative easing, which, however, has so far not yielded any lasting concrete results.
How do I trade the USD/JPY?
Trading the USD/JPY is very popular in the foreign exchange market, as it involves two of the world's major currencies, the US dollar and the Japanese yen. Here are the steps to follow when trading the USD/JPY:
- Understanding the USD/JPY: Before you start trading the USD/JPY, it is important to understand how this currency pair works. The USD/JPY is a very volatile currency pair, which is often influenced by economic and political events in the US and Japan.
- Choosing a trading platform: There are many online trading platforms that allow you to trade currencies, so it is important to choose the one that best suits your needs. Make sure the platform you choose has advanced trading tools and strong security.
- Analyse the charts: Before opening a position, it is important to analyse the charts to determine the likely direction of the market. Traders often use technical analysis and fundamental analysis to assess the economic health of the US and Japan.
- Opening a position: Once you have determined the likely direction of the market, you can open a position by buying or selling the currency pair. If you think the US dollar will strengthen against the Japanese yen, you can buy the USD/JPY pair. If you think the Japanese yen will strengthen against the US dollar, you can sell the USD/JPY.
- Manage risk: Trading the USD/JPY carries risk, so it is important to manage your risk. Set a stop-loss to limit losses if the market moves against you. Also use a take-profit to lock in profits if the market moves in the direction you expect.