Insights Into Trading The USD/JPY Currency Pair

USD/JPY currency pair is trading at a 52-week trading range of 99.9730 on the lower end and 125.2720 on the high end. Clearly, the yen has appreciated substantially in recent weeks, and this trend looks likely to continue given the extreme volatility in currency markets of late. The Brexit decision on Thursday, June 23 to thousand 16 has led to a rapid appreciation of the Japanese yen as currency traders, investors and speculators flocked to this safe-haven currency.

For the year-to-date, the USD/JPY pair has depreciated by 16.23%, a tribute to the strength and resilience of the Japanese yen. This has been brought upon by extreme volatility in financial markets with a risk-off approach being adopted to equities and an exodus to safe-haven assets such as gold bullion, government bonds and other fixed-interest-bearing investments. Over the past 3 months, this currency pair has depreciated by 7.08% and over the past 5 trading days it has depreciated by 2.34%. Clearly, the trend in this instance indicates a strengthening Japanese Yen and a markedly weaker greenback.

Governor Haruhiko Kuroda Leaves Door Open to QE

The yen has continued to make gains in currency markets as the Governor of the Bank of Japan, Kuroda signaled that they would be no further quantitative easing at this juncture. There is no immediate indication as to further monetary stimulus policy in the short term according to the branch managers of the Bank of Japan. According to Governor Haruhiko Kuroda, the Japanese economy is in recovery mode and there is stability in its financial system. He has made a point of stressing that quantitative easing measures must continue until such time as economic growth targets are hit and the inflation objective of 2% is reached. He left the door open to additional quantitative easing measures as required by the Japanese economy.

Bond Yields Plunge as JPY Soars

Meanwhile, the yield on the Japanese 20-year government bond dipped into negative territory for the first time in history. The 30-year yield also plunged to 0.015% as the rush to government bonds intensified in the wake of the Brexit decision. On Wednesday, 6 July, the 10-year government bond in Japan posted a yield of -0.275%. Currency markets were rocked by news that major UK asset managers prevented investors from withdrawing their funds from real estate funds. This resulted in the GBP hitting a 31-year low mark, and the yen as the currency of choice rose to 101 to the USD by late afternoon trading in Tokyo. On Tuesday, 5 July, the yen was trading at 102 to the greenback. Clearly, the ascendancy is with the Japanese yen, but it is largely being driven by volatility, anxiety and uncertainty related to the British pound.

Recall that exogenous factors are causing a strengthening of the USD and the JPY, but endogenous factors are preventing the USD from holding its own against the JPY and other currency pairs. In December 2015, the yield on the 20-year government bond was 1% +, and by Wednesday, 6 July it was -0.005%. That it managed to claw its way into positive territory was encouraging, but deeply concerning. The bond markets is an important barometer of overall economic activity, especially in Japan it is perceived as a safe-haven market for the Asia-Pacific region and the broader global economy. As demand for Japanese government bond increases (10 year bonds, 20 year bonds, 30 year bonds and 40 Eurobonds), so money flows from equities to bonds. Currencies are perceived as highly volatile, but the yen has the distinct honour of being a safe-haven currency.

Nikkei Closes Lower as Yen Strengthens

The bank of Japan may need to act to prevent the yen from rising too quickly against the greenback. This may bode well for cheaper imports, but it certainly does nothing for Japanese exporters are responsible for the bulk of economic activity for the country. By the close of the day on Thursday, 7 July 2016, the Nikkei 225 index was trading 0.67% lower at 15,276.24, down 102.75 points. This movement is precisely what analysts expect with an appreciating Japanese Yen.