Five rules for trading the yen crosses

If you are looking for opportunities to trade away from the USD then the Japanese yen (JPY) crosses such as EUR/JPY, GBP/JPY, AUD/JPY, NZDJ/PY and CAD/JPY could be an option for you. 

The USD is the world’s reserve currency which means it is affected by many factors, whereas the yen crosses pairs are less influenced by news announcements and easier to trade technically.

In other words, it may be easier to get an insight to what moves the crosses in comparison to what moves the USD.

Another reason for trading non-USD pairs is to diversify your risk and widen your scope for potential, trading more than just a strong or weak USD. There is often also good volatility on the JPY crosses, which presents opportunities, and currently the spreads are more attractive than ever.

Rule 1: Prepare for volatility

JPY crosses can be just as volatile as the majors. During times of lower liquidity volatility can be higher and you may risk being stopped out on a whipsaw. To combat this, you must carefully consider when is a good time to place a wider stop loss and target larger profits.

Rule 2: Watch the USD/JPY

USD/JPY is a key outlet for JPY buying and selling. Watch the technical levels of this pair since it has explosive tendencies and a break-out through a level could spill over into the JPY crosses.

Rule 3: Know each cross

When trading any pair it is important you know the characteristics of that pair. For example, EURJPY and GBP/JPY are among the most volatile, AUD/JPY and NZD/JPY are popular carry trades and CAD/JPY can be highly correlated with oil price.

Rule 4: Trade the trend

Because most of the forex market involves trades with USD, most daily news will move USD-based currency pairs. Since there are less variables influencing crosses it means they can have cleaner trends and ranges which are easier to follow and technical levels can hold more than they do for the majors.

Here are some tips for spotting a trend:

  • Use a set of rules to confirm the direction of a trend, for example to confirm an uptrend determine two higher highs and two higher lows and vice-versa for a down trend.
  • Use trend lines and channels on your charts
  • Stay on top of Bank of Japan (BoJ) actions that can weaken the JPY and kick-off longer term trends.
  • Know when the market sentiment leans towards risk of BoJ intervention, which has historically weakened the JPY.

Rule 5: Watch the carry trade

The carry trade is when speculators buy high interest currencies and sell currencies with low interest rates to receive the interest rate difference. It is a popular forex trading strategy that guarantees some return on medium or long-term positions.

The Reserve Bank of Australia (RBA) has one of the highest interest rates, currently at 3.50%, whilst the Bank of Japan (BoJ) has low interest rates close to 0.10%. This makes AUD/JPY and other pairs with a large interest rate differential an attractive carry trade.

When there is the view that a country will increase their interest rate, the outlook is usually that more capital will likely flow into the country as investors seek a larger return and, consequently, there may be an expectation that the value of the currency will rise. Carry traders focus on interest rate expectations and are drawn to trades where there is an expected rate hike in the higher yielding currency.

Carry trades work best when investors have a high risk appetite and a positive economic outlook. When speculators favour carry trades, they sell the JPY and buy a high-yielding currency. To measure risk appetite you could follow risk markets such as the S&P and the FTSE; a bull rally reflects the global markets appetite to invest. However, a spate of risk aversion could cause the carry trade to unwind and JPY to strengthen.

Related posts

Leave a Comment

Time limit is exhausted. Please reload CAPTCHA.