The Japanese Yen (JPY) frustrated many traders this year. The once volatile currency, it now trades in tight ranges. For example, the USDJPY, the most important among JPY pairs, traded within an 18 pips range yesterday.
Not that other currency pairs traveled a lot more, but if we use the ATR (Average True Range) to check other pairs’ activity, we notice something different. For example, the AUDUSD yesterday’s range was 47 pips, or more than twice the USDJPY. Or, the USDCAD – 67 pips. Not to mention GBPUSD – 79 pips.
Enough said. All USD major pairs had a bigger daily range than the USDJPY. And this was a common theme for 2020, regardless of the pandemic.
So what happened to the JPY, and why the USDJPY’s market behavior changed so dramatically?
USDJPY and the Correlation with the U.S. Yields
The first thing to look at when analyzing the USDJPY pair is the U.S. bond market. When yields drop, the USDJPY drops too. The opposite is true when yields bounce.
Lower yields are a theme in financial markets even before the pandemic. Negative yields are a success story, and we should get used to it for quite some time from now on.
However the story of the USDJPY is far from being dependent only on the U.S. rates. If there is one thing every trader knows when it comes to financial markets, is that correlations work until they do not.
From a fundamental perspective, the change in the Japanese leadership this year did not affect the USDJPY pair. Many argue that the correlation explained here is too strong for the USDJPY to react even to important political changes. After all, the longest-serving Japanese prime minister stepped down, and what did the USDJPY do? Nothing.
On the other hand, others will say that Abe stepping down was nothing new for the markets. He had only one year left from his mandate and hinted many times at possible early retirement.
In the traders’ language, the USDJPY pair seems to be coiling. That is, it builds energy for a breakout. Either bullish or bearish, it does not matter, but when compared with what other USD majors did, the USDJPY lags tremendously.
We may even say that the last time the USDJPY broke out was in 2016, right after President Trump’s election. Could the upcoming U.S. Presidential elections be the event the USDJPY is preparing for?