4 things to know about the JPY

Most people know that the JPY gains in a negative risk environment, but falls in a positive risk environment. However, here are four things to know about the JPY: including US 10 year yields, oil prices, the COT report, and of course BOJ monetary policy

Bank of Japan Monetary Policy

The Bank of Japan has a strong bearish bias. WIth Japan struggling with deflationary pressures for years and a large QE program, the outlook for the Bank of Japan remains tilted to the downside. 

US10Y correlation 

With the BoJ so bearish the rate differentials between the Japanese 10y and the US 10 y are usually just seen in the ebbs and flows of the US 10 y. Remember that the BoJ has yield curve control on their bond yields. So, the key point to note is this: 

A falling US10Y = a rising JPY

A rising US10Y = a falling JPY

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USDJPY & US10 year correlation

This correlation is not always perfect as it can ebb and flow, but it is a correlation to be aware of when trading the JPY and in particular the USDJPY. Look at the USDJPY chart below and its close correlation with US10y. 

Oil prices

Rising oil prices is a negative for the JPY as pricier crude take JPY out of Japan. Japan buys most of its oil from overseas and a weak Yen will make those imports more expensive. If oil starts gaining to the upside watch out as this can weaken the JPY.

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Oil vs JPY

COT report

The fact that the BoJ is likely to remain on hold with their interest rates, while the rest of the world is expected to hike rates has recently resulted in levels of selling from asset managers and leveraged funds. Check out the table below to see current levels. It is always worth checking the COT report to look for stretched positioning and then look out for which fundamental shifts can leave the stretched positions vulnerable.

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