Original article by TradingView user RiJoMOnr. This rewritten version expands upon the original ideas while maintaining the author’s insights and analysis on USD, JPY, CHF, and psychological elements critical to FX trading.
An In-Depth Analysis of USD, JPY, CHF and the Psychology Behind Forex Trading
Foreign exchange (Forex) trading is not just about monitoring price charts or running technical indicators. While economic fundamentals and market sentiment certainly matter, every trader must also master another crucial factor: psychology. In this breakdown, we examine the movement of the USD, JPY, and CHF — three currencies with distinctive relationships shaped heavily by macroeconomic forces, risk sentiment, and behavior-driven flows. We also explore how mindset can solidify or sabotage a trading strategy.
This deeper dive draws from a trading view originally posted by RiJoMOnr but broadens its scope, giving room to better understand the trends and mental frameworks that every Forex trader should be aware of.
USD: Strength from Structure
The U.S. Dollar (USD) remains the world’s leading reserve currency, forming one leg of most major Forex pairs. Whether traders are analyzing EUR/USD, USD/JPY, or USD/CHF, understanding the dollar’s movements is central to assessing momentum in other pairs.
Key insights into the USD:
– Recent economic data suggests resilience in U.S. growth, keeping the Federal Reserve on a hawkish path.
– The Federal Reserve continues to combat inflation, leading to upward pressure on U.S. interest rates, which supports the USD relative to lower-yielding currencies.
– Risk-off scenarios still favor the USD, even against traditional safe havens like the Japanese Yen and Swiss Franc.
At the macro level, several pillars support USD strength:
1. Rate Differentials: The U.S. economy’s relative growth advantage compared to Europe or Japan allows the Fed to maintain a tighter monetary stance, pushing yields higher. This attracts international capital flows into U.S. Treasuries, strengthening the dollar as investors seek bonds denominated in USD.
2. Reserve Status: Approximately 60% of global foreign-exchange reserves are held in USD. Even during periods of global instability, this reserve status secures capital flows into the U.S., driving USD demand higher.
3. Global Liquidity Crunch: In periods of financial stress, dollar liquidity becomes paramount (e.g., in March 2020 during the initial COVID crisis). Central banks scramble for USD to secure international payment positions, causing strengthening in the Greenback.
4. Bond Market Influence: U.S. Treasury yields act as a global benchmark. Rising yields elevate the dollar, particularly when real yields (adjusted for inflation) remain positive relative to JGBs (Japan) and Bunds (Germany).
JPY: A Carry Trade Classic Losing Ground
The Japanese Yen (JPY) has long been known as a funding currency for carry trades. With persistently low or even negative interest rates, the Bank of Japan (BoJ) makes borrowing in JPY cheap. Traders often short the Yen and invest in higher-yielding currencies. However, this carry trade structure can reverse rapidly in risk-off environments when traders rush to cover shorts, pushing the Yen higher.
Recent observations on JPY:
– Despite its historical safe-haven role, JPY has weakened significantly due to the BoJ’s refusal to raise rates, even as inflation rises.
– Yield divergence between U.S. Treasuries and Japanese Government Bonds (JGBs) hits historic levels, encouraging dollar-based investors to short Yen continuously.
– A weaker Yen can be beneficial for Japan’s exporting economy (especially electronics and autos), but excessive devaluation risks importing inflation.
Key structural points:
1. BoJ Policy Longevity: The Bank of Japan has stuck to yield curve control for over a decade. This suppresses yields, lowers the cost of capital for Japanese businesses, and limits the appreciation of the Yen.
2. Demographics and Savings Flows: With a rapidly aging population,
Explore this further here: USD/JPY trading.