The main driver of the Japanese yen/U.S. dollar currency pair isn’t just a matter of Treasuries but of the interest rates in both Japan and the U.S as well. The pair carries a measure of risk that determines when to buy or sell the USD/JPY in terms of the interest rates that determine their direction.
Many find it complicated to trade the Japanese yen against the U.S. dollar but it can become less complex when the yen is understood in terms of U.S. Treasury bonds, notes, and bills. A good broker can help you sort through the process as well.
Key Takeaways
- USD/JPY represents the currency exchange rate for the U.S. dollar and the Japanese yen.
- The USD/JPY currency pair has traditionally had a close correlation with U.S. Treasuries.
- Treasury bond prices go down when interest rates head higher and this lifts the U.S. dollar, strengthening USD/JPY prices.
- The USD/JPY pair can also be a determinant of market risk.
What Is the USD/JPY Currency Pair?
The abbreviation USD/JPY represents the currency exchange rate for the U.S. dollar and the Japanese yen. The pair shows how many yen are required to buy one U.S. dollar, the quote currency, and the base currency respectively. The pair’s exchange rate is one of the most liquid and most traded in the world. The yen is used as a reserve currency just like the U.S. dollar.
The best time to trade this currency pair is generally between 8 a.m. and 11 a.m. ET. There’s a greater chance of finding the biggest price moves because there’s more movement and more volatility in the market during these three hours. The markets in Tokyo aren’t open but they’re both open in London and New York.
USD/JPY Relationship With Treasuries
The USD/JPY currency pair has traditionally had a close correlation with U.S. Treasuries. The yen tends to weaken relative to the dollar when yields on Treasury bonds, notes, and bills rise because people can borrow yen more cheaply to buy higher-yielding dollars. Higher interest rates generally increase the value of a country’s currency.
Increasing interest rates in the U.S. accompanied by lower Treasuries prices often cause the USD to strengthen relative to the JPY. The rate of interest paid on a Treasury instrument is referred to as yields and it has an inverse relationship with bond prices. A flight to liquidity occurs when yields slump and this liquidity must find a home so currencies can become attractive.
Market Trends Related to the Currency Pair
The USD/JPY pair can also be a determinant of market risk. Treasury bond yields rise as the economy grows when markets are in search of risk trades. Yields are also a signal of risk. Treasury bond prices tend to rise when panic of fear hits the markets, causing yields to fall. The price of the U.S. dollar can weaken against the yen when this happens.
Japan has maintained very low interest rates for quite some time, however. This has led to the yen’s status as the premier funding currency. Investors can seek higher interest rate instruments for carry trade purposes within its major trading partners by selling a lower-yielding currency such as the yen with current interest rates below its major trading partners. They include the U.K., U.S., Canada, Switzerland, Australia, and New Zealand.
Carry trades have been a major funding source for investors. You’re able to boost your returns if you sell the USD/JPY for U.S. dollars and you use those dollars to obtain higher-yielding instruments such as Treasury bonds.
You can boost your returns if you sell the USD/JPY for U.S. dollars and use those dollars to obtain higher-yielding instruments such as Treasury bonds.
Monitoring USD/JPY Opportunities
Short- and long-term investors may want to employ different strategies when it comes to trading the USD/JPY pair. Short-term traders may want to monitor two-year Treasury bonds and the stock market while long-term traders would benefit from paying attention to the 10- and 30-year bond numbers. It’s worth looking at the S&P 500 indexes for possible early warnings of changes in correlations due to the nature of the USD/JPY pair’s correlations to the stock and bond markets,
These changes in correlations can occur for several reasons. Bond prices may dilute and have varying effects on the USD/JPY pair if the U.S. issues more debt by sales of Treasury bonds and adds money to the system. What if the U.S. buys back Treasury bonds and adds money to the system? Would that mean a positive correlation for the USD/JPY pair? The answer is varied because it’s based on good economic outlooks versus recessionary environments.
How Does the Balance of Trade Affect USD/JPY?
Nations with trade surpluses will often see the USD/JPY pair as a favorable investment because the market traditionally views this pair as a chance to seek greater buying power and higher interest.
What Does It Mean to Long or Short the USD/JPY?
Currencies trade in pairs. You’ll always go long or buy one currency to go short or sell the other. This will correspond with the first currency which is known as the base currency. Going long the USD/JPY would be to buy dollars and sell yen. Going short the pair would entail the opposite.
How Many Yen Is One Dollar Worth?
The prices of the U.S. dollar and Japanese yen float freely against one another on the forex market. The exchange rate between the two will change from day to day and trend over time as a result. One USD was worth roughly 150.18 JPY on Oct. 17, 2024. This was almost as high as the peak rate of 158.9 JPY in the late 1990s.
The Bottom Line
The economic laws of supply and demand will ultimately serve as a strong factor in pricing when evaluating the relationship between the USD/JPY currency pair. It’s also closely tied to bond pricing in the respective countries.
Investors express their views on the pair through a carry trade, commonly viewed by the market as a negative for Japan’s economy because it deflates its currency. This is a USD/JPY short. It would be USD/JPY positive and a buy indicator if Japan repatriated its yen home because it weakens its currency and strengthens its economy.
Correction—April 17, 2023: The definition of going long or short the USD/JPY pair has been amended to reflect which one you buy or sell.
