The USDJPY is one of the most traded currency pairs and most interesting to trade as it’s main characteristic is the fact that it is highly correlated with equity markets.This means that what is happening with equity markets around the globe is influencing the USDJPY and the USDJPY influences the equities markets around the world.
Therefore, monetary policy and economic data that move equities should matter the most for the USDJPY, even more than economic releases out of Japan.
The pair lately witnessed an impressive rally as Bank of Japan is running a massive quantitative easing program and there are no signs it is going to stop anytime soon. This makes the JPY to be a victim of inflating assets in the equity markets.
What matters the most for the USDJPY are the following:
- equity markets, especially the US ones; – monetary policies in both US and Japan. The best example is that by the time both central banks were running quantitative easing programs, the USDJPY pair traveled aggressively to the upside.
- central banks interest rate decisions and press conferences. Bank of Japan is meeting on a monthly basis while Fed on a six weeks basis. In between there are minutes released in US.
- Tankan report in Japan is it is illustrating the overall shape of the Japanese economy.
Important Economic Releases To Watch In Japan
Lately, the most important thing to watch when it comes to the Japanese economy is what the central bank (Bank of Japan) is doing or saying when it comes to the Japanese bond buying program.
It is well-known now that the bond buying program in Japan, or the quantitative easing as it is being also called, is the most aggressive one in the world in the sense that, in order for you to have a comparison, it is three times bigger than the one in the United States but applied on an economy that is two times smaller.
This makes the dynamics in the Japanese economy being heavily influenced by the monetary policy Bank of Japan is conducting and this makes every speech, press conference, meeting, to be carefully scrutinized by traders all over the world trying to understand the faith of the JPY.
As mentioned in the first part of this article, regular economic releases like CPI (Consumer Price Index), GDP (Gross Domestic Product), Tankan report, etc, are also market movers in the USDJPY pair but are secondary in importance as market is focused most of the times on the direct correlation between USDJPY and the world equity markets in general, and US equity markets in special.
The classical relationship between interest rates and central bank decision applies here as well as it is known that higher inflation brings higher interest rates while lower inflation brings lower interest rates. This means whenever the CPI release is due, traders should embrace for an increase in volatility.
Important Economic Releases To Watch In United States
When it comes to United States, we must start with the fact that this is the biggest economy in the world and it goes without saying that a lot of important economic news are being released each and every month.
Because the central bank of the United States, the Federal Reserve, is having a dual mandate, it is obvious that jobs data (Non-Farm Payrolls) and inflation (CPI) are the ones that really matter. However, there are some other pieces of economic releases that influence markets, as follows: ISM (Institute for Supply Management) Manufacturing and Non-manufacturing (these are the equivalent of Europe’s PMI’s mentioned a bit earlier, Retail Sales (released on a monthly basis), GDP (release on a quarterly basis), PPI (Producer Price Index), ADP (private payrolls), Durable Goods Orders, etc.
What To Expect From Economic Releases
Expect economic releases to mean almost nothing for the USDJPY most of the times as they are being released in a trading session (Asian trading session) that is characterized by low liquidity and low volatility. However, if the actual economic release differs greatly from the actual one, look for market to move as this low liquidity environment is great for sharp moves.
But still, the one thing that really matters is the correlation with US equity markets so when cash is opening in the United States as well and on futures one should look for what is the direction of the equity markets in order to have an educated guess about what is happening with the USDJPY.
As a comparison between the two types of economic news, by far, the really important one are those that come from the United States and not from Japan. In this way, we can actually say that news out of Japan should be interpreted as 2nd tier news when it comes to those out of the United States.