The complex USD/JPY explained

Question

Hello Anna, I have recently discovered your website.  There is one forex question which has always puzzled me.  Commentators regularly say that the dollar the ultimate “safe” play when markets fall due to perceptions of riskier times ahead.  Why is it then that dollar yen is said to fall in response to increased risk in the market? Why is it said to follow the Nikkei 225 up and down? Thanks

Answer

Hi many thanks for your email and question about the USD/JPY which I will do my best to answer as follows:

To start with the USD/JPY is probably one of the most complex in the forex market, if not the most complex for several reasons:

1.It is composed of two currencies which have a strong relationship to the market’s appetite for risk, the cost of money and debt.

2.Individually both currencies are considered ‘safe haven’.

3.The Yen is also heavily influenced by its association with the carry
trade.

4.The US dollar is the currency of first reserve (at least for the time
being).

5.There is a close correlation between the Yen and Nikkei 225 with Japanese investors as the primary drivers of their own market.

6.Both currencies, in particular the Yen, are heavily influenced and manipulated by their respective central banks. The BOJ, in particular, makesno secret of its interventionist policy to ensure the Yen does not strengthen, and so threaten Japanese exporters.

7.Japanese exporters invoice in the foreign currency and not in their own
currency which is reflected in bi-annual inflows of Yen as these currencies
are converted, generally in March and September. This is a standard
accounting procedure.

8.At present, and for the foreseeable future, there is no interest rate
differential to drive this pair in the conventional sense.

Finally, when markets are in risk off mode, the USD will rise – particularly
against the EUR, GBP, AUD etc but not against the JPY where it will fall for
the above reasons.

I hope the above helps to clarify this for you, and I should also mention that I cover this in more detail in my book : A Three Dimensional Approach To Forex Trading Kind regards – Anna

About Anna 1027 Articles
Hi – my name is Anna Coulling and I am a full time currency, commodities and equities trader. I have been involved in both trading and investing for over fifteen years and have traded many different financial instruments, from options and futures to stocks and commodities. I write and publish articles ( mostly for free ) for UK and international publications on a wide variety of financial issues, and in particular I enjoy helping others learn how to invest and trade.

1 Comment on The complex USD/JPY explained

  1. Halo Anna. It is a beautiful name you have. Thanks for all the work you have done . .educating mentoring and writing books. I went on pension with out a pension. was busy the last 3 years to make myself a trader. but only lost money so far. Have a Binary and forex acc. Cheers till later Melady. Regards. Harry West. South Africa.

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