The USD/JPY pair reached a five year high of 125.50 in 2015, ending a three-year rally. Then, the pair started moving lower and reached a low of 99.03 in 2016. Since then, the pair has not had major moves and has traded between a range of 118 and 104.
To starters, the USD/JPY pair is one of the most important pairs in the world. This is because of the power behind the American and the Japanese economy. From a GDP standpoint, the US is the biggest economy on earth while Japan is the third, behind China.
In addition to this, the yen is viewed as a safe haven. As such, in times of turbulence, investors tend to flock to the currency. To many traders, this is an ironic situation. How can a currency of a country so close to North Korea be a safe haven?
The answer to this is about the country’s foreign assets which are considered to be substantial. For years, the country has loaded up on US treasuries. It has more than $1.1 trillion in treasuries, making it the biggest holder of US treasuries after China. In addition, the make the currency ideal as a funding currency. In this, investors borrow the currency because of its low yields, sell it, and then use the proceeds to buy higher-yielding assets. As geopolitical tensions rise, the investors may unwind their trades which involves buying the funding currency.
Therefore, this year, as global tensions have eased, more traders have exited their Yen trades causing it to lose by more than 4%. The only reason the pair didn’t rise much was the assurance by Kuroda that the BOJ would start normalizing potentially in April next year. But early today, he changed language and sounded more dovish when he said that the would continue for a while. Therefore, expect the pair to continue moving higher.
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