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Currency Pair Trading: How and When to Trade USD/JPY

   

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With high liquidity and low bid-ask spreads, USD/JPY is a popular currency pair for experienced traders as well as beginners. Since the financial crisis in 2008, Japan’s yen has demonstrated itself as a reliable reserve currency, becoming the world’s third-largest safe-haven currency in recent years. The USD/JPY pairing also plays an important role in trading activity throughout Asian markets, since JPY is often bought or sold as a substitute for more unpredictable currencies in the region.

Because JPY is the leading reserve currency in the Asian market, its high liquidity is a benefit to traders looking to capitalize on market movement in countries whose currencies would otherwise be tougher to trade—especially at a large volume. Even though the USD/JPY pairing offers greater stability and liquidity than other pairings, traders should still study the market factors that can affect price movements.

Here’s some insight into the timing considerations and other market influences to watch when trading USD/JPY.

When to Trade USD/JPY

In general, USD/JPY 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.

First things first: There are time periods during the day that you almost always want to avoid. Unless unusual market factors require an urgent reaction from the trader, it’s best to avoid trades between 03:00-05:00 GMT, when the Tokyo market is nearing the end of the day and both the London and New York markets have yet to open.

Another quiet period to avoid is between 21:00-24:00 GMT, when the New York market has just closed, London is asleep, and the Tokyo market has not yet opened. A quiet market rarely offers good trading prospects. Even if you’re able to turn a profit, most or all of those earnings could be eaten up by commissions.

That said, the ideal window for USD/JPY trading is generally between 12:00-15:00 GMT, when market activity is at its highest. Both the New York and London markets overlap with this window, and trading activity tends to be high even though the Tokyo market isn’t open for the day. The chart below illustrates the dramatic USD/JPY movement after the 12:00 GMT mark, extending to 15:00 GMT and sometimes even a little longer:

The volatility in this trading window represents better profit potential for traders, while spreads remain tight and liquidity is high.

Market Triggers Affecting USD/JPY

While the USD/JPY pairing tends to be a stable one, there are market factors traders should monitor when considering prospective trades. One such market factor is the role of Japanese interest rates. Traditionally, the low interest rates maintained by the Bank of Japan have heightened interest in JPY as a carry trade. The Bank of Japan is also known for keeping tight control on these interest rates, maintaining global interest in JPY as a reserve currency. But if the country’s interest rates rise all of a sudden, it would almost certainly depress demand for USD/JPY trades, limiting the liquidity of this pairing.

Other economic factors such as GDP, wage growth, and consumer price index can also affect the valuation of either USD or JPY, and thus affect their appeal as a pairing. Bear in mind, too, that since JPY is heavily involved in trading throughout other Asian markets, economic and political events in China, South Korea, or other Asian countries can affect the strength of the USD/JPY pairing.

Conclusion

USD/JPY is a high-liquidity pairing that plays an important role in Asian market trading. Whether you’re a beginner or an experienced trader, the keys to success with this pairing come down to picking the right timing windows to execute your trades and paying attention to interest rates and other market factors that affect the pairing’s price movement.

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