Instrument : &JPY_Index
The currency index is used for analysis and trading of the Japanese yen JPY against the rest of the Forex market. A portfolio of most liquid currencies is used as a market systemic indicator: EUR, USD, GBP, AUD, CHF, CAD.
The following are the advantages of the currency index &JPY_Index : (a) the index reaction to the fundamental events in Japan’s economy is the most obvious and stable, (b) the index sensitivity to fundamental events in other currency zones is minimal, which allows to detect low-volatility trend movement of the index that characterizes objectively the state of Japan’s economy. The theoretical bases for the component composition of the index can be found below in the section “Application field".
|&JPY_Index||№||Asset||Volume / 1 PCI||Percentage||Volume (USD) / 1 PCI||Unit of measurеment|
|Fixed spread, pip||33||33||33|
|Floating Spread, pip||33||33||33|
|Order distance, pip||-||-||-|
|Swap (long/short) in pips on Vol||-0.082 / -0.031||-0.082 / -0.031||-0.082 / -0.031|
|>=77.85||0.78 – 111.79||>=0.78|
|The value of 1 pip in USD for the Vol||0||0||0|
|Week day||Trading hours (CET)||Local trading hours|
|Monday||00:00 — 24:00||00:00 — 24:00|
|Tuesday||00:00 — 24:00||00:00 — 24:00|
|Wednesday||00:00 — 24:00||00:00 — 24:00|
|Thursday||00:00 — 24:00||00:00 — 24:00|
|Friday||00:00 — 22:00||00:00 — 22:00|
In the foreign exchange turnover study carried out by the Bank of International Settlement in April 2013 7 leading currencies, which we have included for considering, stand out in monthly exchange turnover volumes.
|Currency||Turnover share, %|
Тable 1. Central bank foreign turnover. April 2013
In the right hand column the respective shares of currencies in the foreign exchange turnover of regulators are presented in descending order.
In creating the index we consider (quote) JPY against “portfolio standard”, composed of 6 remaining liquid currencies: USD + GBP + EUR + AUD + CHF + CAD. The weight optimization is carried out so that the standard possesses the minimum sensitivity with respect to the events in Japan. The weights, which correspond to the quoted standard, are selected on the basis of currency zone “non-interference” principle.
Let us explain the application of that principle. The table of liquid currency priority for foreign exchanges quoted against JPY is made on the basis of foreign exchange turnover 2013 study , where we apply a numerically small value 0.1% for the turnover share of the currencies not presented in the source.
|Currency pair||Turnover share, %||Residual influence share, %|
Тable 2. Currency pair monthly turnover. April 2013
The total share of JPY turnover relative to the liquid instruments under consideration is 22.2%. Then the residual share is equal to the difference between the total share and the currency pair share.
The residual share characterizes the currency (JPY) stability with respect to changes in the price of the quoted part. Indeed, in order to introduce significant volatility into the index the participation of remaining “counterpart” currencies (JPY vs X) is required with the weights equal to their share in the foreign exchange operations. Therefore the values from the right hand column of the Table 2 were applied for determining the currency weights for creation of the index.
Let us remind that the structure of the index can be represented as follows:
JPY / ( W1*USD + W2*GBP + W3*AUD + W4*CHF + W5*EUR + W6*CAD )
We shall take the Wi weights for the standard proportional to the residual influence share (the right hand column of the Table 2). Thus, we are raising the index stability with respect to events in Japan. Then the index sensitivity will be determined by the base part – JPY. The estimates yield the percentage composition of the portfolio, presented in the Structure table..
The instrument & JPY _Index is highly sensitive with respect to fundamental changes in Japan’s economic development and therefore well suited for trend following strategy in periods when key fundamental events are anticipated.
In NetTradeX trading platform buying the instrument means capital allocation between a long position in JPY and a short position in the portfolio standard.
&JPY_Index can be used for comparative analysis of the index vs. the instrument &JPYUSD (the reciprocal of the popular currency pair USDJPY), by building, for example, a percentage chart in the NetTradeX terminal for the two instruments (Fig.1) and studying the price dynamics during 2014. It is evident that since the end of the summer of 2014 the currency pair started to fall much faster than the index, which allows to make a conclusion, for example, that the USD was the main contributor to the fall.
By comparing the price dynamics of the index and the currency pair for long-term trade (Fig.2) it is evident that at the beginning of 2008 the JPY index rose substantially in a short period of time while the &JPYUSD rose much less noticeably, i.e. in that crisis period the dynamics (and the volatility) of Japan’s currency with respect to the basket of global currencies (more precisely, our portfolio standard) was much stronger than the dynamics of the yen with respect to the US dollar.
Traders, who specialize in fundamental analysis and focus on the developments in Japan’s economy and want to filter out the influence of other currency zones will be comfortable trading this instrument.