Daily Forex Update: USD/JPY

To comprehend the importance of Japanese Yen within the world of global finance, one needs to understand the Bank of Japan’s (BOJ) stance on rates. The stance is uncomplicated: keep rates low, and avoid overtly hawkish statements. Such statements from the BOJ would frighten investors and traders across the globe, and potentially factor towards an increase of the current 0.10 percent central bank rate. This low central bank rate makes the Yen the preferred currency to borrow (that is, sell) to fund the purchase of higher-yielding assets. For example, Yen is often sold in order to fund the purchase of Australian Dollars – thus capitalizing on the 4.50 percent interest rate in Australia. This is called a "carry trade," which is a long position on the AUD/JPY. To benefit from the carry means to benefit from the 4.40 percent difference in interest rates in these two countries.

Many equities traders follow the Yen closely in order to understand the risk appetite and aversion in the market; for example an uptrending USD/JPY suggests risk appetite. For bulls in the equities markets, it’s now important to identify where selling pressure will show up on the USD/JPY, and from where the pair could trade lower – which would signal risk aversion.