Apart from the technicals what other tools should i employ when analysing the Yen pairs? I know that they can reflect investor risk sentiment at a particular time but what tools would help me gauge this risk sentiment at the start of every trading session (London) hence giving me a clearer picture as to what side of the trade i want to be on.
George
Factors I consider to be key are:
1) Risk tolerance as measured by the performance of equity markets. If the Dow, Nasdaq & S&P 500 finish higher, followed by a rise in the Nikkei and Hang Seng, then the mood going into the European open is generally positive, which is usually bad new for the yen. If US futures point to a strong open on Wall Street, then this is also a yen sell signal. If the Vix (measure of volatility) is low, then the yen generally does worse but if the Vix is running high, there is always the risk of a sharp reversal in currency markets, which will see the yen appreciate sharply.
2) Fundamentals. Strong economic data out of the US is bad for the yen, but weak data, which points to a requirement for lower interest rates in the US, is good for the yen and usually the yen crosses as it usually leads to a rise in risk aversion. Japanese economic fundamentals have practically no impact on the yen exchange rate, odd as it may seem. The only one to keep a fixed eye on is the CPI.
3) Commodity prices. A normal rally in commodity prices generally leads to a rally in the commodity currencies and benefits the carry trade and AUD/JPY, CAD/JPY, NOK/JPY and NZD/JPY. Major spikes in gold and oil however are generally the result of speculative hedges and can result in steep declines in USD/JPY.
4) Timing & positioning. Because of the interest rate differentials and the implied costs/earnings, many fund managers do not want to be long on the yen as we make the transition from the US to the Asian session. The yen can often fall significantly late on a Friday, particulalry against the high yielders, although recent volatility in markets has led to liquidation of a big number of positions going into the weekend.
