CFDs are a leveraged product and can result in losses that exceed deposits. Trading CFDs may not be suitable for everyone, so please ensure you fully understand the risks and take care to manage your exposure.

Can USD/JPY gain momentum?

Volatility, FED uncertainty and how to trade USD/JPY

CFDs are a leveraged product and can result in losses that exceed deposits. Trading CFDs may not be suitable for everyone, so please ensure you fully understand the risks and take care to manage your exposure.
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I understand safe havens. The Japanese Yen is one of them. In February 2016, the USD/JPY exchange rate fluctuated between 121 to 111. After loosing 1000 pips in the first 10 trading days, we saw a recovery of 375 pips in 3 days only to be followed by the loss of saw pips back to 111by Feb 24th, with the pair ending the month around the 114 mark.

Anyone trading the pair, will get excited by these figures. We are talking big price movements in short periods of time.

Let’s look at the drivers behind these spectacular moves to understand where the pair is heading next.

Volatility

Volatility in 2016 has been tremendously high. To put this into perspective, historically the Volatility index VIX averages about 17 through the last years. However in 2016, we are averaging 23 so far. That’s a 35% higher average which led investors to run towards safe havens such as the Yen and Gold.

FED Uncertainty

Since raising interests rates in Dec 2015, USD did well against other major currencies such as GBP, EUR but not so much against JPY. This can be partly explained by volatility mentioned above, but also by what this general market turmoil means for federal policy making going forward.

The picture has changed dramatically. In January, analysts were pricing in 4 rate hikes in 2016. In February, the questions around China’s growth persisted and the actual state of recovery in the US was questioned. An NFP reading of 151k clearly disappointed.

Taking all these factors into consideration, the majority of investors now thinks there won’t be any rate hikes in 2016. 

How to trade USD/JPY

However, views in financial markets can change very quickly. The past week has seen the pair struggle to overcome the 114 level. Tomorrow, this struggle could all be history with a strong NFP reading. If investors can regain confidence in a continued recovery in the US and maybe a rate hike in late 2016, the US$ would certainly profit from it and do well against the Yen similarly to how it has performed against other major currencies. A retest of February highs at 114.87 look like the next target and a move through this level could open the doors for a significant move higher.

If NFP disappoints, we could see a renewed test of 111 which has been strong support in 2016. Twice the level has held strong in February which subsequent bounces of 375 and 300 pip moves higher.

So keep NFP in mind but also think about how the bigger picture may change with this imminent release of figures. 

This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication.  Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. 

CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.