Monetary Policy is one of the leading factors that influence the movements of currencies’ prices. On October 31st, the Bank of Japan announced the expansion of its monetary stimulus measure in the hope of improving its sluggish economy. The release of this new announcement immediately brought about a plummet in the price of Japanese Yen relative to the U.S dollar. It is interesting to note that just one day before the Japanese decision, the Federal Reserve announced the voting result to quit its Quantitative Easing programme. While Japan is now struggling with its low GDP growth rate, the U.S has reported the strongest economy ever since the financial crisis in 2008. The considerable GDP growth rate is likely to bring about a raise in the federal funds rate. Higher interest rate will attract more international capital, which drives up the relative price of USD in the long term.
A Bigger Picture
The fundamental value of JPY or USD is just part of the story and can be more related to the long-term trend. In order to indicate whether it is a good time to trade, it is important to know about the relationship between the price perceived by the public and the intrinsic value. Several widely used trading indicators are applied to finding out the trend of market prices as shown in the featured picture.
Moving Average Line
Using moving average lines which track different intervals of time helps to show the changes in the trends of price movements. The 9-day simple moving average line (indicated by the red line) has just exceeded the 21-day simple moving average line (indicated by the purple line ), which shows that the price of USD relative to JPY has started to bounce back according to the latest data. However, the signal of buying can be reversed very soon as the recent trends changed frequently.
Moving Average Convergence Divergence
The great divergence of MACD from zero suggests overbuying when the divergence is positive and overselling when the divergence is negative. Shortly after October 31st, investors seemed to be very confident about the strong dollar relative to Japanese Yen, resulting in overbuying dollar against JPY. This was then followed by a convergence of price to its real value with a decrease in the relative price. However, recently the relative price seemed to start to bounce back with a increasing positive divergence.
Stochastics measures the relationship between the close price and highest/lowest price within certain time periods. It shows that the USD/JPY is currently overbought suggesting a signal for selling.
Two bullish candlesticks with a decreasing length were followed by a bearish candlestick, suggesting a possible downward trend in the near future.
It is very possible that the relative price of USD against JPY will increase in the long term while decrease shortly. However, it is too early to draw a conclusion that investors should take a short position now in US dollar against JPY. Will the end of the Quantitative Easing programme bring negative impacts on the U.S economy in the future? Did the U.S overestimate its economic conditions? Long-term investors may consider those questions before making their decisions.
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