Since December 2015, the FEDS have increased the FED rate from 0.5% to 2.0% during its last meeting on 13th June 2018. During the June meeting the FED chairman also signalled that, it plans to increase the rate to 3.0% in 2019, and 3.5% in 2020. The interest rate hike has, albeit, multiple deleterious effects on economy including more expensive cost of borrowing, higher inflation rate, and reduced consumer spending affecting businesses and investments alike.
However, from among these it’s impact on USD in relation to major global currencies is palpably significant and deserves a separate attention. Particularly, USD/JPY pair has often been found to be affected significantly by FOMC decisions. From a macro standpoint, it is the difference between the US and Japanese interest rates that controls the USD/JPY parity. This difference is directly related to the US interest rate, as the Bank of Japan has steadfastly maintained its interest rate at paltry 0.1% for several years now. Thus, as the FOMC decides to increase US interest rate, the USD/JPY rate should strengthen in the wake of FOMC decision. In addition, JPY, despite its lower interest rates is considered a ‘Safe Heaven Currency.’ In other words, say when VIX index – indicating volatility is US markets – is higher, the investors go long in JPY, while they flee from JPY in lower VIX environment. Over past couple of months, VIX has dropped from about 20.12 in April to 12.79 at the time of this writing. Barring any serious Global conflicts, major trade wars, or US political upheaval, the VIX indicator could be expected to remain at a rational-lower level. This weakens JPY and strengthens USD further. The ‘Carry Forward,’ trades also impact the USD/JPY rates due to significant disparity between interest rates in US and Japan. In its simplest form, an investor sells USD/JPY for US dollars, and uses the funds to invest in higher yielding US instruments such as Treasury bonds. This would push the price of the pair down in relation to other US alternate investments in increasing interest rate environment.
US Trade Policies
US trade policy decisions also play an important role in determining the direction of the currency pair price movement. The current administration’s policy of establishing trade barriers and impose tariffs on Steel and Aluminium has proved to be disastrous for USD/JPY pair. The USD/JPY came under tremendous pressure earlier this week due to buying into ‘Safe Haven,’ alternatives, such as, stronger US bonds, and Japanese Yen. Conceivably, the demand for US treasuries and Yen was driven by escalating tariff war between US and China.
Affected Currency Pairs
The prime currency pairs like USD/JPY, EUR/USD or GBP/USD are affected by a myriad of factors that range from purely economic to political to global geo-politics. As a result, we at Platinum Trading Institute have a policy of analyzing these events weekly, and often daily for you and share the information with you through periodic blogs (such as this), Platinum Trading Floor (PTF), or Platinum Television (PTV). In addition to these published media, our trader/mentors provide a one-on-one coaching in fundamental understanding of trading principles, underlying economic factors, and understanding of interrelated factors among FOREX, Equity, and now Crypto markets.
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