Historically, the USD/JPY foreign currency pair has reacted strongly during both times of bearish and bullish market conditions. The USD/JPY moving in favor of the Japanese Yen could be attributed to it being viewed as a safer alternative to other financial instruments during times of geopolitical unrest which leads to bullish conditions. When investors have ‘flocked’ to the Yen, this has historically resulted in the US Dollar decreasing in value against it.
The chart below demonstrates the USD/JPY foreign currency pair reacting to both bullish and bearish events in 2016/2017:
50 and 100 Day Moving Average Indicators
During bearish trends, the 50-day moving average has historically been positioned below the 100-day moving average. During bullish trends, the 100-day moving average has been positioned below the 50-day moving average. A cross of these technical day trading indicators has historically signaled a trend reversal.
- Bearish Example: During times of heightened political tensions on the Korean Peninsula, the USD/JPY foreign currency pair’s 50-day moving average has historically moved toward and crossed under the 100-day moving average as the Japanese Yen gained in value vs the US Dollar.
- Bullish Example: During times of elevated bullish sentiment, such as the election of a new president promising positive fiscal policy, the USD/JPY foreign currency pair’s 50-day moving average has historically moved toward and crossed over the 100-day moving average as investors have historically taken a ‘risk-on’ sentiment by selling the Japanese Yen.
Effects of Bearish Market Conditions on the Yen Carry Trade
The Yen carry trade is one example of a foreign currency trading strategy that can potentially be executed during stable market times to capitalize on low Japanese Yen interest rates. To implement this trade, traders borrow currency in the form of the Yen at low interest rates and exchange it for the currency of a country that pays a higher interest rate on its government issued bonds. The Yen carry trade enables investors to potentially benefit from the difference in currency based interest rates.
A bearish market may encourage traders to exit their Yen carry trade as the interest rate on the currency is now higher. When these market conditions occur, one potential trade could be to borrow the US Dollar in order to buy the Japanese Yen with the goal of potentially benefitting from the now higher interest rate on the Yen.
As always, remember past performance is not indicative of future results and you should always trade within your risk tolerance levels.
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