Forex Trading - USDJPY

Trading Forex Pairs

Never before has it been such a blessing to be trading forex pairs that rely so heavily upon their fundamentals. Whilst the Euro and USD are whipsawing with every conflicting news/spin story, the Japanese Yen is maintaining its safe haven status, and its economic fundamentals show no signs of changing anytime soon. European politicians are still making my goldfish look intelligent – politicians are swimming in circles without realising the solution (food) is right in front of them – but then again my fish doesn’t face the fear of being voted out of its tank. Though not directly related, I think John Cleese’s piece early last year summed it up perfectly: http://marionvalentine66.wordpress.com/2011/01/23/new-european-terrorist-alerts-by-john-cleese/. Completely politically incorrect, and therefore well worth a read.

On a more focused and on topic note, June 2010 saw the USDJPY forex pair breaking from its trading range to the downside (fell through 90), and in June 2011 it made a similar break through the 80 mark. It has since stabilised, partly due to the Bank of Japan selling the currency to weaken it, but in the long run there is very little they can do. Here’s a chart of the past year and a half:

A new forex trader may look at Japan and see a country with little growth or inflation and a practically zero rates policy. The chance of Japan raising interest rates is minimal due to the low growth and inflation, so what drivers are there for the currency? Especially when it has a debt to GDP ratio of over 200%, which has to be even worse than Australians’ credit card habits.

Trading the Yen

What the more experienced forex trader has learnt over the past couple of years is that, in stark contrast to the US, Japan can print as much money as it likes to pay of its debts without the risk of causing hyperinflation. The underlying reason? With no offence intended, the Japanese are the hardest workers who spend the least amount of money in their own economy, making them fantastic savers (and boosters of Australian tourism revenue, keep it coming). The extra money pumped into the economy isn’t as likely to be spent, just saved, making Japan one of the safest countries in the world and least likely to default on its debt. The same forex traders have realised that the US has not been afforded the same luxury, and risks a serious case of hyperinflation should it continue to print money in order to pay of its rising public debt bills, therefore reducing the currency’s appeal as a safe haven.

For these reasons I believe the Bank of Japan will struggle to put a floor underneath their currency, and considering their 3 recent interjections have been at lower levels each time, hoping the market will provide some natural support, I would be quite comfortable shorting the USDJPY pair until the 75 mark. From then on it becomes a game of chicken with the Bank of Japan, and then you might as well play blackjack or trade the Euro.

The trade still relies on Euro concerns boosting the demand for safe haven assets and the US doing little to make big spending cuts, but the fundamentals are in place. On a technical note, the USDJPY forex pair has been in its current trading range for a month less than when the previous breakout occurred, is still firmly in its downwards channel, below the majority of moving averages and is regularly testing the floor of the range. None support a bullish move, and neither do I.

In the pipeline: Copper’s role as a global growth predictor

Bullish on: BHP, RIO (miners to gain on Chinese monetary policy easing), Shanghai Composite (monetary policy easing to drive the index higher)

Bearish on: US 10 year Treasury Notes (yields too low relative to equity markets), USDJPY (Yen strength as safe haven asset)

As always, please post any questions or comments that you may have. If you are looking for a beginner’s guide to trading, try www.tradingpimm.blogspot.com.