Why is USDJPY a Very Popular Asset for Trading
One of the favourite currency pairs on the entire Forex dashboard, the USDJPY has a unique role in Forex trading. Its correlation with the global stock markets makes it a benchmark currency pair for risk-off and risk-on market moves.
The Japanese economy outperforms most of its peers, but it struggled with an unexpected problem in the last decades: aging population. Because of it, consumption levels fell significantly, making it difficult for the economy to keep expanding.
Usually, this put pressure on the Bank of Japan (BOJ) to intervene. It did so by easing the monetary policy, slashing the interest rate level to almost zero and keeping it there for decades.
As such, the JPY became the de-facto currency to borrow money to fund the stock acquisition. And, with it, the USDJPY pair, one of the most popular trading assets worldwide.
Explaining the USDJPY and the Stock Market Correlation
The idea is quite simple. Before buying stocks, investors look for the best alternative to borrow funds. Logically, they favour the low-interest currencies, like the JPY.
Next, traders convert the JPY into USD, to fund the stock acquisition. This creates a positive flow on the USDJPY and a positive correlation between the pair and the DJIA (Dow Jones Industrial Average) index.
In trading, correlations are significant in the outcome of a trade. Overlooking them is a risky business, as flows don’t care about technical, nor fundamental analysis.
The opposite happens when investors decide to pull the money out of the stock market. Because of interest rate hikes or other macro-decisions taken by the central bank, investors may decide to book the profits.
To do that, first, they need to convert the stocks into dollars. Next, with the dollars, they go on the Forex market and buy the JPY to pay for the original loan.
And so, one of the most potent correlations in the current financial market has a simple explanation for everyone to understand.
One of the things that make the USDJPY pair a desirable trading asset it’s the low spread it has. For a major pair (i.e., a pair that has the USD in its competence), the USDJPY has one of the lowest spreads in Forex.
Any Forex broker strives to offer the best possible conditions to trade the USDJPY pair, and lowering spreads and commissions is the way to go.
We’ve already mentioned the correlation between the USDJPY and the stock market. Any Forex education guide will tell you that there’s more to it.
More precisely, the pair is the driving force in the risk-on and risk-off trading. In risk-on, the USDJPY rises together with the stock market, the EURUSD, AUDUSD, GBPUSD, and NZDUSD too. At the same time, the USDCAD pair declines.
In a risk-off move, everything goes in reverse. Because it sits at the root of this problem, the USDJPY remains one of the most emblematic currency pairs part of the Forex dashboard.
To sum up, look for all the JPY pairs to be driven by the price action in the USDJPY major. No matter what other pairs do, if the USDJPY fluctuates sharply, every other JPY pair will start doing the same thing, in a directly correlated manner.