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Benefits & Risks Trading USDJPY
Benefits of trading USDJPY
- Relatively low bid-ask spreads and enticing liquidity
- Suitable for seasoned and beginner traders
- High levels of volatility, driven by Asian market forces
Risks of trading USDJPY
- BOJ intervention when price movements threaten economic growth
- Whilst volatility is a benefit, it can mean sudden price fluctuations
- Algo trading can make it hard to keep up with price movements
What is the USDJPY and why trade it?
- The United States dollar vs. Japanese yen is the second most actively traded currency pair in the world, accounting for close to one fifth of global turnover according to the Bank of International Settlements.
- The USDJPY is sometimes used by the nickname the “Gopher.”
- As it is such an actively traded currency, the depth of liquidity and competitive pricing makes it an ideal pair to be able to easily trade in and out of quickly.
- Due to being major safe havens, either one of these currencies typically experiences an increase in value during global economic downturns.
- Representing over 4% of all global reserves, the Japanese Yen is the predominant and extensively traded currency in Asia.
What drives the USDJPY?
There are many drivers of the currency, including but not limited to:
- The USDJPY is heavily influenced by macroeconomic events in Asia and can be seen as a strong link between East and West.
- The USDJPY rate often reflects the differentials between the interest rates in the US and Japan.
- The USDJPY pair often reflects Differing central bank policies e.g., quantitative easing in Japan vs. quantitative tightening in the US.
- News events in Japan and the United States. E.g., earthquakes in Japan or changes in government.
- Economic data being released such as Japanese inflation rates or GDP releases in either country.
- The Japanese yen is often considered a safe haven currency in times of economic uncertainty due to previous past performance in times of risk-off market conditions.
When is the most active time to trade the USDJPY?
There is sometimes conflicting information regarding the best time to trade the USDJPY currency pair. Some commentators believe the ideal time is 12:00-15:00 GMT due to the crossover of the London and New York markets and others believe the best time is at the open of the Asian trading session around at 00:00 UTC.
What are the advantages of trading the USDJPY?
- As the USDJPY is the second most actively traded currency pair, the liquidity available is deep and the pricing is extremely competitive, second only to EURUSD.
- Due to the interest rate differentials between the US and Japan, traders historically have attempted to trade the USDJPY for the purposes of what is known as a “carry trade.” A carry trade involves a trader borrowing in a low interest-rate currency to buy a currency or asset earning a higher interest rate.
- The Japanese yen is often seen as a safe haven in times of risk-off sentiment and can benefit from changes in market conditions such as a falling stock market.
When can you trade USDJPY?
In general, USDJPY trades should be targeted during periods of peak activity. These ideal trading windows represent the best potential for profitable price movements. Keep in mind that even though forex trading is available 24 hours a day, smart traders are diligent about timing their trades to hit their peak trading windows.
Should I trade USDJPY?
With high liquidity and low bid-ask spreads, USDJPY is a popular currency pair for experienced traders as well as beginners. Even though the USDJPY pairing offers greater stability and liquidity than other pairings, traders should still study the market factors that can affect its price movements.
What platforms can I use to trade USDJPY?