Emerginvest Blog

There has been a lot said in the past few months about the direction of the US dollar and its inevitable demise against world currencies. Given the trillions in new debt and the seemingly endless growth of the Federal Reserve’s balance sheet, it’s easy to see where these predictions are coming from. More dollars created usually means each dollar becomes worth less – basic supply and demand. However, the dollar has been acting surprisingly strong versus most currencies bucking conventional wisdom. Europe is seen to have worst problems than the US and resource heavy countries like Australia are still contending with falling commodity prices. Whether this trend continues is a topic for another day. The Japanese Yen, however, is one currency that has been rising strongly against the dollar.

For nearly two decades, Japan has battled persistent deflation and stagnant economic growth. In an effort to spur growth, policy makers lowered rates to zero; not unlike what the US is doing present day. This presented investors with an excellent opportunity to make relatively easy money. With rates near zero, an investor could borrow money in yen and convert it to dollars where interest rates were much higher. This was called the Yen Carry Trade and for years hedge funds used it to generate easy profits. The effect of this trade was that Yen were being sold and dollars were being bought. This of course caused the Yen to depreciate in value versus the dollar. As rates have come down in the US and investors flee anything risky, the Yen has been able to rise as the carry trade is unwound.

Japan is an economy dependent on exports, so it is in their economic best interest to have a weak Yen, as it makes their products cheaper in foreign countries. So as the Yen has been rising, exporters have had the double shot of a global recession and a rising currency. Japan’s policy makers are desperately trying to weaken the currency and it appears they might be having some success. The yen has been showing some weakness the past few days against the dollar and appears poised to continue lower.

A proxy for the Yen/USD relationship is the ETF, FXY. The chart of FXY shows a persistent up trend that shows signs of exhaustion. At the turn of the year, the Yen broke through its uptrend line which was the first signal the run might be nearing its conclusion. It’s important to understand that in strongly trending markets, sentiment does not change in one instant. This can be seen as FXY rises back above the trendline in what appears to be the start of another bull run. But, as is typical with these types of initial breaks, FXY was not able to make a new high and proceeded to drop below the trendline once again. It is this second break combined with the double top that confirms that FXY is poised to move lower with an initial target of $105. To play this drop, one can outright short the FXY or buy puts. Stops can be placed at the recent highs at around $114. For those unable to short stock or buy options, look to some of Japan’s exporters such as Sony (SNE) or Toyota (TM). These stocks have been hurt by the strong yen and should benefit if it drops further.

By: Chris Harne
Emerginvest Technical Analyst
Disclosure: Emerginvest is an international finance portal, providing analysis and data on 120+ world markets to help individuals find investments from around the world. Chris Harne holds a position on FXY.

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Filed under: Chris (Technical Analyst), Commentary on World Financial News, Developed Markets, Uncategorized, World Analysis