3 Things to Consider When Trading Yen Crosses

Yen crosses are a whole different beast. Some yen crosses, such as GBP/JPY, are known to be action-packed and highly volatile. They can produce big, sharp moves and shower you with pips, but they can also chew you up and spit you out faster than you can say “Stopped out!”

As such, you have to be extra careful when trading these currency cross pairs. There are three things in particular that you have to consider when trading yen crosses:

1. USD/JPY price action

It’s not enough that you can spot key levels or chart patterns on the yen cross that you’re trading. You have to be mindful of what’s going on on USD/JPY too. Unlike Las Vegas, what happens in USD/JPY doesn’t always stay in USD/JPY. Often, price action on USD/JPY can spill over to the yen crosses.

Did USD/JPY just break below a critical support level? This could be an early sign that GBP/JPY is about to do the same. That being the case, you may want to consider opening up a GBP/JPY short position or trimming that open long position of yours.

2. Risk environment

Because of the yen’s status as a safe haven currency, yen crosses tend to be heavily affected by shifts in risk sentiment. As a matter of fact, EUR/JPY is often considered a barometer of risk.

When the markets are in a risk-taking mood, you’re likely to see yen pairs rally as traders ditch the low-yielding safe haven yen for higher-yielding currencies such as the Australian dollar. On the other hand, when risk is off, you’re probably going to find these same yen crosses heading for lower ground as safe haven flows cause the yen to appreciate.

This unique characteristic of yen crosses is due, in part, to Japan’s near-zero interest rates. Because borrowing costs are very low in Japan, the Japanese yen is a popular choice for carry trades. If you’ll recall, carry trades involve borrowing or selling an asset with a low interest rate, such as the yen, and using it to purchase an asset with a higher interest rate, such as the aforementioned Australian dollar.

3. Threat of intervention

As you all know, direct market interventions are quite rare and only happen once in a blue moon. However, when they do occur, they cause extremely wild spikes on yen pairs that can whip you out if you’re not careful. As such, it’s important to assess the likelihood of a Bank of Japan (BOJ) intervention, especially in times like these when the yen is rallying like crazy.

Ask yourself this: “Is USD/JPY near critical lows?” If so, you should probably think twice about buying the yen. The BOJ seems to base most of its exchange rate policy decisions on USD/JPY price levels, so if you see that this pair is threatening to forge new lows, you should keep your guard up. Once again, we see just how important it is to check USD/JPY when trading yen crosses.

Another question you must ask yourself is: “Has the BOJ been jawboning lately?” If Japanese officials have been speaking up about how they’re concerned and uncomfortable with where the yen is, they may be just a day away from stepping in.

Lastly, in gauging the threat of an intervention, you must consider the time of day, especially if you’re a short-term trader. This is because the BOJ usually intervenes during the Tokyo session. So if you’re day trading or scalping during the London or New York session, you should be in the clear, at least until the next Tokyo session opens.

There you have it, folks, three tips that’ll help you with trading yen crosses! Use them wisely and maybe you’ll be able to tame these beasts and turn them into your go-to pairs!

  • Finjoman

    Thanks. How will BOJ intervention affect the EuroDollar. Regards. Finjoman

  • Mk

    Question: above you mention that crosses like the GBP/JPY are highly volatile, but in the school, it says that eur and jpy crosses are better at ranging, holding technical levels etc, which is contradictory to what you stated above? Unless I am not correct.. Please clarify, thank you!

  • Pingback: Asian Session Recap - April 16, 2014