It Is Not Easy To Trade The Yen

Don’t be surprised if you read the conclusion of this writing at the head of the topic, because nothing can describe the yen trading better brutal fact. Every day you will always hear and read people analyzing Yen and giving you some prophecies, and maybe you noticed that most of it is guessing. I say that the Yen was always ambiguous currency for most of the traders. The reason is that the Yen has specific traits and specific reasons affecting its direction. Herein we will try to focus on the factors consisting three major sides determining the next Yen movements. Bank of Japan (BoJ) policies, fundamental and Technical analysis. Finally we will put them together to forecasting the price movement next period.

Bank of Japan Policy

It is well known that the BoJ is the most explicit and transparent central bank, however; it is a little bit complicated. The main role of any central bank is to control the inflation and deflation processes. The BoJ is processing these two things either with funding absorbing or fund supply operations. Without delving into sophisticated details about the fund supply operations, you need to know that these operations are monetary tools used to supply the market with local currency (Yen) in order to depreciate the current overly evaluated currency. The BoJ adopted this policy since September 2016 using collateralized tools as purchasing / borrowing Japanese securities (JGS) – outright or repo, uncollateralized tools as commercial papers, or certificates of deposits (CDs).

These operations are conducted through auctions, these auctions to be conducted -according to the latest monetary policy issue of 8 to 10 times a month for the next 4 months. The main problem is to be up to date with the results of these auctions and make your calculations to determine the exact effect on the currency.

On the other hand, the USD dominated assets can be used to supply the bank with the USD, and here another problem arises. The USD dominated assets has a very short due in days, in order to refund these money, BoJ sometimes has to make some SWAPs. Foreign exchange SWAP forms another two liabilities on the government: a) refunding the borrowed dollar within a period do not exceed the one year (most of times it is weeks or days) b) paying interests for that debit. The good news is it keeps the currency in a tide range, but sometimes it makes some corrections to cover these SWAPs when it comes to due.

Yen Specific Traits

It may be drawn to your attention two main characteristics regarding the Yen pairs. First, it is always quote currency and never base, although it is one of the minors even before the emerging currencies (as ZAR and HKD). Second, it is an index currency which means all base currencies are moving in the same direction before the yen regardless their main indexes.  That would get us to a primary result that the Yen is so vulnerable and can be affected easily by any external factor more than the Japanese internal factors itself. In other words, if any of the base currencies had major data release like CPI, employment, interest rates, it will leave a significant effect on the Yen more than any other currency.

For instance; we can see after the release of the New Zealand inflation data for December, inflation increased to be graeter the previous month (0.4 YoY) ;and moreover, forecasted (0.3 YoY). The kiwi soared before the Yen around 140 pips while with GBP it was 80pips, with AUD 60 and with the USD raised no more than 50 pips. Another example the increase in the US unemployment rate previous week caused the Dollar to increased before the Yen 60 pips, GBP 50pips, AUD50 pips, NZD 40 PIPS; meanwhile it increased before the Euro itself only 30 pips.

I want to highlight the fact that he Yen is massively affected by the data putting bearish pressure on it; meanwhile the data which gives the Yen boost it does not usually react to it. For instance; the Yen showed no major bullish movements when the other central banks started the interest rate cut wave in 2015/2016.

Fundamental Orientation

Regarding the fundamental factors in general, we can see no major correlation between the numbers and the prices. However; Japan as a first class exporter, the yen shows a harmonized correlation to the trade balance numbers. The following diagrams show us the rising of the trade balance from -1.63 trillion Yen deficit April 2014 till it reached 0.36 trillion January 2017.

Japanese trade balance Adjusted
Japanese trade balance Adjusted

Technical outlook

The general outlook of the forex market is giving me signals for a very distinguished period which I believe will change the direction of most of the currencies for a long period. Yen as a passive currency will have to wait other currencies to make its mind; however, I believe that there will be some volatility within tide range.

Japan Bonds 2Y Yield
Japan Bonds 2Y Yield


Japan Bonds 10Y Yield
Japan Bonds 10Y Yield

USD/JPY is much correlated to the NIKKIE225 which started to show weakness. We can also recognize the weak yields market through the next diagrams.

N225 weekly chart
N225 weekly chart

The next 2 days will be decisive for the Yen on the long term. I believe the Yen pairs are going to bull shortly before it starts to retrace on the medium term. The next chart is a USD/JPY and it is applicable for all other Yen pairs. The good thing about the Yen that it has a ‘decisive personality’, which means once it decides to move in one direction it continues for a very long time. If the scenario worked like that we will see USD/JPY retracing to the 38.2% of 111.6 then it will continue then to the 50% 108.8. We strongly recommend applying this strategy to the NZD/USD and avoiding GBP/JPY.

USD/JPY [weekly chart]
USD/JPY [weekly chart]

To sum up what we said in some lines

  • Yen has special traits like, (unique quote currency, non-volatile and directional, the most effected currency by the economic calendar).
  • BoJ since September 2016 adopting the fund supply operations, which targets the Yen depreciation.
  • BoJ excessive usage of the SWAP market may be bad for the Japanese economy, but good for traders.
  • Ambiguity of the auctions results make the mission harder.
  • Fundamentally the Yen is much correlated to the trade balance more than the other indicators.
  • Technically we may see next weeks bearish Yen pairs, however any strong event on the economic calendar puts the Yen on the Bear side, it will be welcomed.
  • It Is Not Easy To Trade The Yen.

Published by

Mohamed Fathalla

Self-taught trader started trading and analyzing FX since the year 2000. Graduated from the law and economics school. Writing sophisticated analytical researches for different forex analysis web sites. The main trait of his writings is the simplicity by gathering all fundamental, technical and political factors in a simple shape, thorough which the normal trader can make a clear decision upon one comprehensive analysis. He joined the team in 2017. Now he is working on developing a new fundamental indictor [MFI]. The main idea of this indicator is to give a clear indication for a specific currency strength or weakness before other currencies from the fundamental perspective.