Forex Trading Confidential: What Makes USDJPY Move?

WHAT  DRIVES MOVEMENTS IN USDJPY?

When you see USDJPY move sharply in one direction or the other assume it is being driven by more than just US dollar buying or selling.

More often than not the flow involved another currency or asset class that is using or has used the JPY as a funding currency, depending on whether a position is being initiated or unwound.

Another term for this is a carry trade.

What is a carry trade?

A carry trade is a trading strategy that involves borrowing money in a low-interest-rate currency and investing it in a higher-interest-rate currency. The goal is to profit from the interest rate differential between the two currencies As I will show, a low interet currency can alo be used toi fund vuying of other instruments.

Logic says that hedge funds and other players had abandoned the JPY carry trades after the earlier in the year meltdown in JPY carry trades. However, the market moves on Friday, November 25 suggest otherwise as short JPY positions  (e.g. currency crosses) were unwound, not just vs other currencies but vs. other assets well.

As I have noted, when you see two currencies move in opposite directions you can affine there is a cross flow going through that the market is having trouble absorbing.

Let’s look at some charts to illustrate this point with daily ranges for November 16 to see how unwinding of short jpy “carry trade” position impacted trading

USDJPY range 156.74-153.97 (1.8%)

Carry trade unwind

GBPJPY range 198.46 – 194.29 (-2.1%)

The bigger loser, stocks vs the JPY

NAS100 range 21247-20336 (-4.4%)

Key Takeaway: Don’t trade with your head stuck in the sand

As these charts show, JPY shorts unwound, not only vs other currencies (GBPJPY was just one example as the USD rise vs all currencies except the JPY) but vs other assets as well, most notably US stocks. It might have just been the Trump Trades (firmer dollar, firmer stock) running out of steam. Whatever the case, you can see the impact of carry trades on not only the forex but other markets as well.

Trading is like a puzzle. Putting the piece together can give a clue to what is driving the price action. As a trader you can then get a sense of what real money flows are doing and act accordingly.

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