Spread Betting: Trading USD/JPY
You may be attracted to spread bet on the US Dollar vs. Japanese yen currency pair because you know so much about both countries and their industries. The rate quoted is how many yen you can get for a dollar, as the dollar is the first currency mentioned, and it is currently running around 7694. Because of the way it is quoted, that means that one US dollar will buy you 76.94 yen, or vice versa.
But a general knowledge of the countries is only the start of learning what you need to know to be able to trade profitably. The manufacturing and industrial base of Japan is well known, with many Japanese products used around the world, most notably in electronics and vehicles. For its part, the United States of America is known around the world for many products.
Many speculators have been shorting the yen in since November 2012 as the Bank of Japan has continued with its fiscal and monetary stimulus which tends to be currency negative. Any intervention by the BOJ to curb the Yen appreciation would be an expensive option for the central bank, as recent figures from the SNB have already shown. [March 2013]
Trade the USD/JPY at Ayondo
To really understand the economies, sufficiently to follow the currency fluctuations, requires both a fundamental and technical analysis. The fundamentals are many, but the main ones can be summarised as the employment, inflation, and manufacturing numbers. Employment is given by the jobless figures, as well as reports of the average working week and pay of employees. Inflation figures are usually issued monthly, and have in the past been adjusted by changing the goods looked at for price increases – but the official statistics are still the ones that will be reviewed by the markets when deciding on trades. Manufacturing numbers are available in many different forms, and include the net production and export figures.
All these criteria are readily available for both the US and Japan. Currencies are also subject to central bank’s interventions. For instance, if the Federal Reserve decides to expand its quantitative easing programmes, this will drive shares and gold higher while the USA dollar might depreciate against the yen. In particular the dollar/yen cross is has been getting more interest from traders as speculators attempt to second guess what the Bank of Japan will do to contain the rise of its currency.
The Yen has the risks of central bank intervention or a substantial change in policy stance, similar to the effect that the Swiss National Bank (SNB) has had on EUR/CHF. The [Japanese] government is not comfortable with its national currency appreciating. Yen’s appreciation in the past has caused ministers headaches because of the threat to the country’s export-reliant economy. It means that if the JPY reaches a pre-drawn ‘line in the sand’, we would not rule out government intervention with the consequence of the Yen falling. The Japanese authorities have intervened repeatedly in the past to limit currency strength and recently they have adopted policies targeting at depreciating the value of the yen. While many of the central bank’s monetary easing measures have followed spikes in the Yen, the Bank of Japan has however denied that its policies directly targeted currency rates. In a statement to market, the bank said that whatever action it takes, it does so to counter the negative impact on the economy, not at directly weakening the yen.
When trading FX, you need to understand the risks associated due to the multitude of factors influencing the price. There is one more factor that plays a major role in the foreign currency markets, and that is the official rate of interest, from the Federal Reserve Board and the Bank of Japan. The rate of interest offered is the most obvious way that the government can seek to influence the currency’s value, as a currency which offers a higher interest to depositors will be perceived as more valuable, all other factors being equal. Japan is presently facing declining exports and struggling local consumption. Trapped in a deflationary circle, the Bank of Japan has decided lately to continue injecting money into the local economy in an effort to contain inflation; to-date it has already pumped over ¥91 trillion. At one point the BOJ have even pledged to scrap its yield floor on the currency, so it can continue to buy enough bonds to maintain its asset purchase programme.
With ‘risk currencies’ under pressure from the ongoing eurozone troubles, the Yen – traditionally a ‘safe haven currency’ – has been bolstered even more than the US Dollar by the turmoil in Europe. Traders should watch for any signs of weakness in the domestic economy as that will put more emphasis on exporting and a weaker JPY.
Trader Rant: Since my last post, the USDJPY got close to my target but then took off again, came back down and then seriously took off….I had no choice but to keep adding to my shorts, (although I was booking profits from longs along the way).. I stopped posting because it simply became one of those trades that you get from time to time that you must wrestle with. It consumes you, it pushes you, it forces you to become imaginative and flexible, to think of alternatives, to really assess the possible risks… But mostly, it was similar to my GBPJPY trade last year, where it got to the point where I could not trade any other opportunities, even though they were popping up everywhere…
It is worth noting that there is a strong link related to risk sentiment between the Dollar/Yen and 10-year US Treasury yields. The USD/JPY normally depreciates when Treasury yields fall and the reverse also holds true, implying that the dollar/yen currency pair tends to move around events like Federal Open Market Committee meetings. Trends are obviously important in the forex markets and can persist for long periods of time; curiously looking at the market on a very long term basis one can see that the dollar/yen has been in 30-year-plus downtrend. The USD/JPY pair could also be a good currency to play the USA tapering story since higher USA yields tend to push dollar/yen up while lower yields push dollar/yen down.
Apart from keeping an eye on the events and announcements involving these named factors, the astute trader will also have a working knowledge of technical analysis, which is the art and science of analysing prices to predict the future. As it is usual to trade currencies for short term gains, the exact market sentiment at any particular time is important, and applying the techniques of technical analysis allows the spread better to make a determination of this. It is important when trading to realize that the analysis only really gives an indication, a balance of probabilities, as to the direction the price is headed, but it does seem to work for many spread betters to increase the chances of profits.
Finally, to make a consistent profit, you need to have a strategy, and a trading plan. This defines exactly what constitutes a good bet, and allow you to produce repeatable results.
Experienced forex traders appreciate that low volatility is almost invariably analogous to a weaker yen, which normally drives commodity currencies, like the Australian and Canadian dollar against the Japanese currency.
Spread Betting on the USD/JPY
Before you bet on the USD/JPY, you should take a couple of weeks to study how it moves and form a winning plan. These major currencies are heavily traded, and you will need to develop a strategy that minimises your losses while allowing winning bets to achieve their full value. The current spread bet quotation is 7697.6 – 7698.4, and the “tight spread”, the 0.8 point difference between the selling and the buying prices, allows you to achieve the best profits, paying less to your spread betting provider.
If you think that the US dollar is going to increase in value, or that the Japanese yen is due for a “correction”, a euphemism for its price falling back, you might place a long bet on this pair, staking say £6.50 per point. Depending on your spread betting company, this can be as easy as clicking “buy” on the deal ticket.
Assume that you are right, and that the rate goes up to 7865.4 – 7866.2. You can close the bet, and take a profit. If you want to check your dealer’s math, you can simply work out how much you won by multiplying the points gained by your stake. The bet opened at 7698.4, the buying price, and closed at 7865.4, the selling price, giving your dealer his small spread as compensation. The difference in points is 7865.4 minus 7698.4, which is 167. Multiplying this by the bet per point, you get £1085.50. As this is a daily bet, automatically rolling over each night, your spread betting provider is justified in making a small interest charge to your account each night, but this shouldn’t amount to much.
Whenever you trade, you want to have a fallback position already prepared, so that you know when to cut your losses if the bet goes against you. In this case, perhaps you close the bet when the quote drops to 7653.9 – 7654.7. You need now to calculate what you have lost.
The bet opened at 7698.4 as before, but now it closed at 7653.9. That means you lost 44.5 points, the difference between the two. At £6.50 per point, that is £289.25 total. As you can see, that is much smaller than your potential gain, and that is how you can profit even if you don’t make winning bets all the time.
Now a “short” example, which for this pair means that you are betting that the US dollar weakens or the Japanese yen gets stronger. Putting a sell or short bet on for £7.25 per point at the original level of 7697.6, you might watch as the quote goes down to 7525.6 – 7526.4. Closing the bet now, at 7526.4, you have gained 7697.6 – 7526.4, or 171.2 points. With your chosen stake, this amounts to £1241.20.
Once again, if the bet went against you, there is a point where you must take your losses and move on. Say it moved to 7742.8 – 7743.6 and you closed your bet, you would have lost 7743.6 – 7697.6, or 46 points. You have kept your total loss down to 46 x £7.25, which is £333.50.
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