A Crash Course in Trading the Japanese Yen
(…And Why Now is Perfect Time
to Short this Currency)
Sean Hyman, Editor, Currency Cross Trader
When I first came over from the stock market to currencies, let’s just say I needed a lot of help. I didn’t know the first thing about trading currencies.
So I needed something that would give a “stock guy” an edge in the currency market.
After a little digging and some testing, I found a strategy that has worked for me for over a decade now. This strategy helped jumpstart my career in the currency world.
Even better, this strategy helped me overcome the hesitations some traders have about trading the confusing “odd currency pairs” that involve the Japanese yen.
Right now, the stars are aligning that will make this Japanese yen strategy even more profitable than usual.
To put this technique to work for yourself, you have to know a few things about Japan’s economy first. Let me explain…
The Secret to Trading the Japanese Yen
As a trader, the first thing you need to know is Japan is a major exporter. Some of the more famous Japanese exports include Toyotas, Hondas, Nissans, and Sony electronics.
As a major exporter, Japan’s overall stock market does well whenever Japanese companies sell lots of cars, electronics, cameras, etc. On the flipside, stocks tend to slump when these companies are selling less.
The cost of these goods determines how much these exporters sell on a daily basis. But the cost is a bit relative – it’s really how foreigners perceive the cost.
Much of this boils down to exchange rates. In other words, if the Japanese yen seems cheap compared to your home currency, then Japanese goods seem cheap because your money goes a long way in buying Japanese goods.
However if the yen is strong, then these goods appear to be very expensive. As a foreign buyer, you’re likely to buy less.
This is why the Japanese yen and Japan’s Nikkei Stock Index have an inverse correlation to each other. When the Japanese stocks drop in value, the yen tends to rise against the dollar and vice versa.
We are seeing this exact set-up right now in Japan. As you can see below, the Nikkei just broke out higher. That means now is the time to be shorting the yen pairs. Check it out below.
Japanese Stocks Break Higher…So the Yen is Starting to Fall Again
To make this even simpler, the Japanese yen tends to be listed second in currency pairs. For instance, if you trade the dollar vs. the yen, you use the symbol USD/JPY. The euro vs. the yen is EUR/JPY, and the Aussie dollar vs. the yen is AUD/JPY.
Therefore, as the yen goes down, it pushes these pairs up. That means as the Nikkei goes up these pairs will tend to rise overall too!
As I mentioned, I first caught on to this stock/currency correlation as a young currency trader. Ever since, it’s been much easier to trade the Japanese yen pairs.
You can see how this correlation is working below. As Japanese stocks fall, the Aussie dollar is dropping at the exact same time compared to the Japanese yen. In other words, the yen is rising in value against the Aussie as Japanese stocks fall. Take a look…
As the Nikkei Breaks its Downward Correction…So Does AUD/JPY!
This tip can take you a long ways in your currency trading before you know anything about the macro economics of any of these nations.
You really don’t have to know too much about currency trading to pick up on this correlation. You just need to recognize that when Japanese stocks pick up steam and trend higher the Japanese yen is likely to fall.
That’s all you need to know in order to profit!
Here’s Why NOW is the Best Time to Get Started
I’ve found this to be an easy “bridge” to help beginning traders get started in the currency market.
Right now is truly the best time to try this out for yourself.
With Japan’s disasters earlier this year, they have never had more incentive to help their economy recover. As they are pushing for a recovery, Japanese stocks should rise once again.
Also, central bankers are still on the warpath about the incredibly strong Japanese yen. Back in March, several central banks in the G-7 (including the Fed) coordinated a massive intervention to push down the yen’s value.
So far, it has not succeeded, but they are likely to keep at it. Eventually, I see these central bankers dragging the yen’s price lower.
All of these dynamics make NOW a great time to check out this simple strategy.
There are so many “yen pairs” out there to choose from that you’ll have plenty to trade just off of this one tip alone.
Bottom line: With the Nikkei breaking higher, it looks like its open season to short the Japanese yen pairs. But going forward, just watching Japanese stocks can easily tell you where the yen is headed next.
Have a Nice Day!
Sean Hyman
Editor, Currency Cross Trader