The Japanese yen has had one of its worst years in recent memory against the US dollar. Why is this one currency pair so critical to watch, and what kinds of opportunities can it open up for forex enthusiasts who trade other currencies? Japan and the United States are close political and economic allies, as well as being two of the most powerful financial forces on earth. Recent announcements by Japanese officials shed light on what might be in store for not just those two nations but for the global economy in its entirety.
But the recent volatility in all world markets, from forex to commodities, demonstrates the need for investors to hedge their positions carefully. Currency options are one of the tactics they use to protect capital in times like these. How can forex options get the job done for busy, risk averse traders? Plus, what are the important facts FX enthusiasts need to know about the ongoing changes in the yen-dollar relationship? Here are the pertinent details as Q2 of 2022 comes to a close.
Options Becoming More Important in Forex Trading
In whipsaw markets, it’s important to use whatever means necessary to minimize losses and preserve gains. That’s one of the forces behind the popularity of FX options, which work much the same as traditional options contracts do. Holders pay a small premium for the chance to lock in an exchange rate.
For account holders, the AvaOptions trading app is simple to use. Using an FX app allows for hedging against positions for sellers or buyers, which means you can go long or short and still use a forex options contract to protect your position. Users gain the ability to hedge risk or trade stand-alone contracts for speculative purposes, just as millions of stock traders do with corporate shares’ options contracts.
Major Dollar/Yen (USD/JPY) Developments
Even those who don’t trade the USD/JPY currency pair follow its changes. As one of the most popular pairs, the dollar-yen pairing can be a good way to get a feel for how two of the world’s largest financial markets are performing in relation to each other.
In some ways, the chart line of USD/JPY serves as an indicator of the relative strength of Asian currencies as they relate to those in the US, Canada, and other nations closely allies with the United States.
The simplest way to get an accurate read on the situation is to review the latest news out of Tokyo or Washington DC, then to then view the 2022 chart for the all-important FX pair.
The Bank of Japan (BOJ) made an official announcement that some took to mean the yen could find strength in the next few weeks. BOJ’s chief, Kuroda, pointed out that he’s not so concerned about recent rate hikes by the US Federal Reserve Bank because there are so many factors that affect the relative strengths of the two currencies. As soon as Kuroda made the remarks, the yen gained slight momentum against the dollar but gave most of it up a few days later. There are two points FX traders should watch with regard to the crucial USD/JPY chart.
Points to Focus On
First, Japan’s currency has taken a pounding against the dollar in 2022. Indeed, except for a short period after the arrival of the COVID pandemic in early 2020, the yen’s value against the US currency has reached a five-year low.
In January, it took 115 yen to purchase a dollar, but as of early June, that amount had shot up to 130 yen per dollar, a deterioration of 13 percent. Even the long-term graphs are an embarrassment for Tokyo. Exactly five years ago, in June 2017, the yen was worth 110 against the USD, thus having lost a full 18 percent of its strength in a half-decade, which was interrupted by a short bout of strengthening midway through the period.
FX devotees can learn a lot from this critical currency relationship and can use both long-term and short-term USD/JPY charts to make their own predictions about whether the Japanese or US economy will show more relative improvement for the rest of 2022 and beyond.
Is it possible the yen has reached a nadir and is set for a comeback? Or, do world events point to a more powerful dollar? This kind of speculation, backed by solid research, is what FX trading is all about and why many take part in it every day. In fact, the volatility of 2022 could make FX even more popular among new traders.