Tradingforex has put together a series of articles that we believe will improve your trading skills and help you get one step ahead in the market. This article is dedicated to providing you with information on GBP/JPY pair and why it is in your advantage to trade this pair.
GBP/JPY is one of the most popular pairs among forex traders for one reason – volatility. Traders love volatility and this pair has it in excess.
The first reason for the high volatility is because GBP/JPY has a high pip value. Since 2005, it has traded roughly between 120.00 and 250.00. That’s an enormous, 15,000 pip change, even over a 5 year period. Simple math shows that a 1% move in GBP at the 135.00 level results in a 135 pip move. In NZD/USD, a similar 1% move only adds up to about 70 pips.
The nature of the pair is the other reason for the volatility in GBP/JPY. The pound sterling was once upon a time the stable, reserve currency of the world but that changed long ago. In recent times, the high interest rates in the UK led to the pound being used in carry trades. The JPY has been the traditional funding currency of carry trades. In the early 2000s, buy a long-term GBP/JPY trade was one of the best moves in the forex market as it appreciated to 247 from 150. From 2000, to 2007, the stable and profitable nature of this trade led it to become very crowded. When the financial crisis hit, everything changed and traders rushed for the exits driving the pair to 120 in early 2009.
The financial crisis also flipped the UK economy on its head. London is a major financial center and financial services are the heart of the UK economy and were the driver of growth. The prospects of that industry are now in a state of flux due to worries about regulation, taxation and the health of the banking industry. On its own, the GBP has grown as volatile as ever and market watchers worry about the health of the UK economy. Coming out of the financial crisis it is showing worrisome signs as economic data continues to disappoint. Compounding the situation is an out-of-control deficit. With elections upcoming, it appears that there isn’t the political will to curb spending, which could lead to a debt crisis. Needless to say – all the heightened worry has led to heightened volatility.
The Japanese economy is also struggling and under a mountain of debt yet the yen remains a stable, safe haven currency. In part, this is due to the huge reserves held by the Bank of Japan. The main reason, however, is the believe that interest rates in Japan will remain close to zero for a very long time. Due to this, whenever market conditions calm, market participants use yen to borrow cheaply and invest in riskier assets that pay more interest than it costs to borrow. Other factors that make yen a stable currency are the size of the Japanese economy (second only to the U.S.) and the export-driven nature of Japan. This works as a buffer to a falling yen. In the short-term, the deflationary pressures in the economy have led to the Bank of Japan to continue quantitative easing programs even as other nations have wound them down. The possibility of increasing the programs is a negative for the yen and further increases GBP/JPY volatility.
The final reason to trade GBP/JPY is that it tracks ‘risk’ very closely. To some extent, all markets move in tandem. When the prospects for the world economy look good, stocks and commodities rise while bonds fall. When sentiment begins to sour, the reverse occurs. This risk appetite/risk aversion trade is a favorite among all traders because it allows them to tap into macro-economic sentiment and profit from intermarket dynamics. One of the pairs that tracks this trade best is GBP/JPY as it generally rises and falls alongside stocks and commodities. So why trade those other markets when you can get all the benefits in forex?
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