Trade #2: Long on the Forex currency pair USD/JPY
When most investors smell a crisis, they start allocating their capital to the US dollar. And that is exactly what has been happening this year leading to the strengthening of the dollar virtually across all its currency pairs. This gave rise to many opportunities for profit. In fact, we even voted the US dollar and the British pound as the currency pair of 2022. However, the dollar offered great trading opportunities on other pairs as well. For one of the best trades of 2022 on Forex, we chose the USD/JPY currency pair.
Those of you who have been following the USDJPY currency pair more closely will agree with us that the strengthening of the US dollar has been happening gradually ending by the end of October. At that time, the USDJPY currency reached its highest price level in several decades. However, for an interesting trading opportunity, let's turn the clock back a few more months to August 25 - do you know why?
That week Japan was releasing the services PMI (purchasing managers index), which illustrates the situation in domestic manufacturing. The PMI value is numerical and if it is below 50, it means a slowdown, and vice versa. The PMI ended up coming in at 49.2, down 1.1 month-on-month. If by that time some of you were getting your hopes up for an interest rate hike by the Bank of Japan, you would probably agree with us that those hopes began to fade after the PMI result was released.
For those of you who do not know - the Bank of Japan is the last one still holding negative interest rates. Japan also has relatively very weak inflation (2.4% in June 2022). Negative interest rates are supported by this weak inflation. Another factor playing into the unlikelihood of an interest rate hike is the huge debt burdening the land of the rising sun. Thus, any increase in interest rates would essentially be the proverbial shooting oneself in the foot, as it would make bond repayments more expensive. Everything, therefore, suggested that interest rates on the Japanese yen would be kept flat.
Currency pair USD/JPY price trend on D1 chart in cTrader platform.
- 29. 8. 2022 - entry into a long position at the level of 137
The main catalyst for the growth of USDJPY
However, the main reason for the monthly increase in the USDJPY currency pair from 138 to 150 must be sought in the US. Here, the situation around interest rates and inflation was very different. While Japan’s inflation was around 2.4% at the time, in the US it was a record 8.5%. Moreover, in terms of fundamentals (jobless claim report numbers lower than expected), all indications were that the both dollar and interest rates would rise. However, we were still waiting for confirmation - the one event that would kick-start it all - and that was soon to come.
The main signal to enter a long position on the USDJPY currency pair was the weekend meeting of central bankers in Jackson Hole (August 25-27). There, Jerome Powell confirmed that the Fed will use its tools with appropriate force, which, looking at practically the highest inflation in the last 40 years, meant a further tightening of interest rates. Powell also mentioned that high market rates would persist for a longer period of time. All this was water to the US dollar’s mill and it led to the aforementioned surge in the USDJPY currency pair.