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#1 12-10-2020 09:05:41

johnedward
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From: Paris - France
Registered: 21-12-2009
Posts: 2910
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USD/JPY: what happened to the pair?

USD/JPY: what happened to the pair?


The JPY has frustrated many traders in 2020. The once volatile currency is now trading in narrow ranges. For example, the USD/JPY, the largest of the JPY pairs, traded in a range of 19 pips on Thursday, for example.

Not that the other currency pairs fluctuated much more, but if we use the ATR (Average True Range) to check the activity of the other pairs, we notice something different. For example, on that same day, the AUD/USD traded in a range of 48 pips, more than double that of the USD/JPY, or the USD/CAD (66 pips), or the GBP/USD (80 pips).

All major USD pairs have a daily range wider than the USD/JPY. And this was a common theme this year, regardless of the virus situation.

So what happened to the JPY, and why did the USD/JPY market behaviour change so dramatically?

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The USD/JPY and its correlation with US yields

The first thing to consider when examining the USD/JPY pair is the US bond market. When yields fall, the USD/JPY pair falls as well. The reverse is true when yields rebound.

Declining yields are a recurring theme in financial markets even before the virus happened. Negative yields are a success story, and we should get used to it for some time from now.

However, the story of the USD/JPY is far from depending solely on US rates. If there is one thing that every trader knows when it comes to financial markets, it is that correlations work until they don't work anymore.

From a fundamental point of view, Japan's change in direction this year has not affected the USD/JPY pair. Many argue that the correlation explained here is too strong for the USD/JPY to react even to major policy changes. After all, Japan's longest-serving prime minister has resigned, and what has the USD/JPY done? Nothing.

On the other hand, others will say that Abe's departure was nothing new to the markets. He only had one year left in the job and he often hinted at a possible early retirement.

For traders, the USD/JPY seems to be rolling up. In other words, it is creating energy for a breakout. Whether it is bullish or bearish doesn't matter, but compared to what other major financial institutions using the USD have done, the USD/JPY is lagging considerably.

It can even be said that the last time the USD/JPY made a breakthrough was 4 years ago, just after Trump's victory. Could the November presidential election be the event the USD/JPY is preparing for?

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"Anything worth having is worth going for - all the way." - J.R. Ewing

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