Take the Plunge:Sell the USD/JPY Currency Pair

The USD is currently trading at 120.98, down 0.18% against the Japanese yen. The currency pair is trending strongly bearish, given the recent decline from over 122.50 to the current level. Analysts across the board are in agreement that the best way to trade this pair is by going short on the USD, and long on the JPY with put options on the pair. The year-to-date return on the currency pair is 1.03%, and it has a 52-week trading range of 115.86 on the low end and 125.86 on the high end. A big part of the reason why we are seeing such precipitous declines in the value of the USD against other currencies is the aftermath of the Fed rate hike. Now that the anxiety and volatility of rate hike expectation has come to pass, and the 25-basis point increase is done and dusted we are seeing less demand for the USD, and the stabilisation of other currencies. According to market analysts, the USD has declined 1.9% since November 2015, although it remains 25% higher than this same period a year ago.

Indicators Attest to Dollar Weakness

VIX Nosedives since Fed Rate Decision

Whenever currency exchange rates are considered, it is important to take the big picture into account. The driver of USD strength was the expectation of a Fed rate hike, based on strong US growth fundamentals. This was evident in the run-up to the December 16 decision by the Federal Reserve Bank to hike interest rates by 0.25%. Emerging market currencies, including the currencies of developed countries across Europe, North America and Asia-Pacific all fell against the USD. Now that the volatility has abated, as is evident from the volatility index (VIX) market participants are largely unconcerned, as future volatility has been driven right down. The volatility index is certainly not moribund, since it is trading in the lower mid-range of the 52-week high and low. The low is 10.88 and the high is 53.29. The year-to-date return on the volatility index is -2.60% with a 1-year return of 22.62%.