The USD/JPY is the third most traded currency pair in the trillion-dollar forex market. The currency pair is one of the most liquid and commands a significant amount of volume ideal for opening and closing trades with ease.
The currency pair pits the U.S dollar as the base currency, representing the United States of America economy. Similarly, the Japanese Yen acts as the quote currency. Therefore the structure or the USD/JPY rate indicates the amount of Japanese Yen required purchase one U.S dollar.
The USD/JPY differs from other currency pairs on the fact that it sees stable action throughout the day whenever the forex market is open. Some of the time to avoid trading, the pair is between 21:00 GMT and Tokyo open time as the pair tends to see reduced volatility levels. Similarly, traders should avoid trading the pair between 03:00 and 05:00 hours, before London opens, as the pair tends to see low volatility during this time.
Factors Influencing USD/JPY
Just like any other currency pair, the USD/JPY rate is influenced by a number of factors. Its price action depends on how traders react to a number of factors or developments both in the U.S and Japan.
Interest rates as regulated by U.S central bank, the Federal Reserve, is one of the factors that influence the USD/JPY rate. Whenever the FED hikes interest rates, the dollar tends to strengthen, leading to an increase in the amount of Japanese Yen required to buy the U.S dollar. In this case, the exchange rate tends to increase.
Similarly, whenever the Bank of Japan hikes interest rates, the Yen tends to strengthen relative to the dollar, leading to a reduction in the amount of dollars required to buy the dollar. In this case, the exchange rate tends to drop.
Economic releases in the two countries also tend to influence how traders buy and sell the currency pair. In the U.S, non-farm payroll, as well as consumer price index and GDP data is some of the economic data closely watched that influence the U.S dollar strength leading to a fluctuation in the USD/JPY rate.
Similarly, Tokyo Area CPI, the Tankan Report, and various economic initiatives implemented by the Japanese government also influence trader’s sentiments on the Yen leading to USD/JPY exchange rate fluctuation.
In addition, the USD/JPY acts as a safe-haven in the forex market. In times of macroeconomic and political uncertainty, traders tend to buy the USD/JPY currency pair as it acts as a safe haven for storing value.
How to Trade USD/JPY
The best way to trade USD/JPY is by using Contract for Difference offered by various brokers in the forex market. A CFD is simply a financial instrument between a broker and trader, whereby one party is able to pay the difference in value of a security.
A CFD makes it possible to speculate on price of the USD/JPY as long as the forex market is opened. In this case, you can enter a long position or buy, if you believe the US dollar is going to strengthen against the Japanese Yen. The profit in this case will be the difference between the buy price and the price at which you exit the trade.
Similarly, you can enter a short position or a sell if you believe the Japanese Yen is going to strengthen against the U.S dollar. The profit in this case will be the difference between the price at which you trigger the sell position and the price at which you close the trade.
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