Yen jumps to five-week high on haven demand: moving averages explained

The Japanese yen was the standout currency on Thursday. USD/JPY's ECB reference rate for 22 October fell 0.53% to 157.05, from 157.88 the day before, as investors sought safety. Investing.com reports that the yen jumped to a five-week high as traders flocked to safe havens.

The trigger was a slide in US tech stocks. According to the investingLive Americas wrap, the Nasdaq sank as AI worries hit chip stocks. Investing.com adds that the US 10-year Treasury yield closed at a one-month low on safe-haven demand. Our sister site has more on the yen's five-week high and the AI selloff. Earlier today we covered the peso's fall; tonight the focus moves to the yen.

What is a moving average?

A moving average is the average price over a set number of recent periods. Each new day, the oldest price drops out and the newest one is added. That is why it "moves".

Prices jump around from day to day. A moving average smooths out that noise so you can see the general direction, or trend. If the price sits above its average, recent prices are higher than the past. If it sits below, recent prices are lower.

There are two common types:

• A simple moving average (SMA) gives every day equal weight.
• An exponential moving average (EMA) gives more weight to recent days, so it reacts faster.

Traders often watch long ones, such as the 200-day average, as a broad guide to the trend.

A worked example

Here are the last five ECB fixings for USD/JPY:

A five-day simple moving average adds them up and divides by five:

1. 158.02 + 158.24 + 158.13 + 157.88 + 157.05 = 789.32
2. 789.32 / 5 = 157.864

The latest fixing, 157.05, is 0.814 yen below that average (157.864 minus 157.05). In yen pairs one pip is 0.01, so that gap is about 81 pips. The price has dropped below its short-term average, which shows the recent move has been toward a stronger yen.

Longer averages matter too. In its Japan CPI preview, investingLive notes that USD/JPY has held a range this month between just under 157 and just under 159, with the 200-day EMA just above 157.50. Using 157.50 as a rough level, the 22 October fixing of 157.05 sits about 0.45 yen, or roughly 45 pips, below it.

You can see the averages on a USD/JPY chart by adding a moving average indicator.

Why it matters for new traders

Moving averages give you a simple, objective way to describe a trend. Many traders watch the same well-known averages, such as the 200-day. So these lines can become reference points that people talk about, as in the investingLive preview.

They have limits. A moving average is built from past prices, so it always lags. It tells you where the price has been, not where it will go. Sudden news can push the price far from any average in one day.

News is due soon. According to investingLive's Asia calendar, Japan's September inflation data is the main focus on Friday. investingLive's preview says core CPI is seen at 2.1%, which would top the Bank of Japan's target for the first time since December. The same source says a firm print would test the lower end of the USD/JPY range, while a soft one would push the pair back toward 159, where it sees intervention risk as the main defence for the yen.

Key terms

• Moving average: the average price over a set number of recent periods, updated each period.
• SMA: a simple moving average, with equal weight on every period.
• EMA: an exponential moving average, with more weight on recent periods.
• Trend: the general direction of prices over time.
• Lag: the delay between a price move and the average reflecting it.
• Pip: the smallest standard price step; 0.01 for yen pairs.