What you need to know about each currency pair. Also reviewed are important cross pairs.
Currency Pairs – Key Characteristics – A Closer Look
Traders often fi nd themselves predisposed to trading one currency over another. They may like a particular currency pair for a lot of reasons and fi nd that they know one currency better than another. Each currency pair, however, has some characteristics or, in a sense, a personality that a trader should get to know. Let’s explore some of these.
USD/JPY – Japan is the world’s second largest economy. However, the yen is very volatile and refl ects a great deal of the internal economics and politics of Japan. The value of the yen has a tendency to go to extreme lows and highs within the same year. Also, since
Japan is in a recovery after a decade of major recession, traders remain very sensitive to any news that may change expectations of economic strength and growth.
Notice this monthly Japanese yen chart. The prices moved from a low near 100 in February 2000 to a high near 135 in January 2002 and back to testing 5-year lows at the end of 2004. Of course, there is a lot of variation in-between. But the trend direction toward strengthening is apparent in this chart.
The Japanese economic recovery of recent years is important for the forex trader because of its role in supporting a strengthening trend in the currency. However, the recovery is fragile, and can be dislodged easily if oil prices increase and if the costs of raw materials surge. Keep in mind that Japan’s economic prospect is also linked to U.S.
fortunes. If the U.S. economy falters, this hurts Japanese prospects because U.S. demand for more Japanese goods would decline. This means that any news on the recovery can result in surprise surges in the price. Extra care is necessary in trading this currency pair. It is not for beginners. Those who trade the USD/JPY must know the
Bank of Japan’s quarterly Tankan report is one of the most popular of economic surveys. The report is compiled from data gathered during the previous fi ve weeks, up to the day before the announcement. The Bank of Japan sends questionnaires to more than ten thousand companies, and the response rate is an astonishing 95% or more. The survey refl ects the activities and sentiments of private corporations, revealing the activities and plans of real businesses running the economy. The survey results produce a diffusion index to indicate business sentiments which is the core of the report. The report of July
1, 2004, was dramatic. It showed an optimistic sentiment that was the strongest regarding the Japanese economy in 13 years. The effect was positive on the Nikkei Index as well as the yen. The currency market waits for the results of this report, and the information in it can provide a guide for trading the yen throughout the year. The Tankan Report is important. You can trade with the consensus or become a contrarian and trade against it!
June survey of Japanese fi rms suggests best outlook since deflationary period started in the early 1990s.
BizAsia, by da – The Japanese quarterly survey, the Tankan survey, is always closely watched, both inside and outside the country.
Its value is that it refl ects how Japanese fi rms view the future in their particular industries. In many respects, it’s better than government forecasts and projections because it measures sentiment from the ground up.
In June, the survey shot up to its highest level since August 1991.
Optimism grew strongly among large manufacturing fi rms with the news pushing the Nikkei share average up 0.6 percent. The Japanese currency also rose strongly to 108 yen to the dollar.
The Tankan survey inquiries of 10,000 businesses spread throughout various sectors of the economy to rate how the road ahead looks. A positive number indicates optimism, a negative one, pessimism.
Unlike the previous quarterly survey, this one showed that even smaller Japanese fi rms exuded confi dence. The small manufacturers’ index was +2, the fi rst positive reading since March 1991. Non-manufacturing firms are also exuding a rosy outlook.
Note: Please see Abe’s book “Understanding Forex: Trading to Win” for the remainder of the chapter. Copies can be obtained from the Freebie section of forexhound.com