Central bank policy

The Bank of Japan has a strong bearish bias. With Japan struggling with deflationary pressures for years and a large QE program, the outlook for the Bank of Japan remains tilted to the downside.

COT report

The fact that the BoJ is likely to remain on hold with their interest rates, while the rest of the world is expected to hike rates has recently resulted in some high levels of selling from asset managers and leveraged funds. Check out the table below:

Cot

With the BoJ so bearish the rate differentials between the Japanese 10y and the US 10y are usually just seen in the ebbs and flows of the US 10y. Remember that the BoJ has yield curve control on their bond yields. So, the key point to note is this:

  • A falling US10Y = a rising JPY.

  • A rising US10Y = a falling JPY.

Correlation

This correlation is not always perfect as it can ebb and flow, but it is a correlation to be aware of when trading the JPY and in particular the USDJPY. Look at the USDJPY chart below and its close correlation with US10y.

USDJPY

Oil prices

Rising oil prices is a negative for the JPY as pricier crude take JPY out of Japan. Japan buys most of its oil from overseas and a weak Yen will make those imports more expensive. If oil starts gaining to the upside watch out as this can weaken the JPY.


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High Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.

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