Like The Yen? Consider These Macro Issues
A Yearning for the Yen
There can be little doubt that an economic
recovery is at hand…worldwide. Yes, some parts of the world are struggling
(Europe) but by and large progress is being made. Japan as well as Asia are
clearly at the forefront on this recovery. While the Nikkei has been a game of
head-fakes over the last decade, this present move higher appears to have legs
and is supported by the data coming out of Japan.
There are a few ways to play this scenario.
Readers will recall that last spring I suggested purchasing shares in
i-Shares Japan (EWJ), those that did and also
added to that position a couple months back have enjoyed not only solid gains,
but gains that I would consider entailed far less risk. For me, a trade that
does not provide a good risk/reward ratio is simply not worth the effort.
The alternate or additional way to play the
recovery is to buy the Japanese currency (Yen) outright in the spot FX market.
In many ways, a currency is a pure play on a particular country. There is no
need to delve through thousands of stocks to figure out which one is best, if
there is outside demand for that countries investments and products, the
currency, all other things being equal (i.e. no intervention) should
appreciate. To me, this is a far cleaner way to take advantage of this
scenario.
I established a long in the Yen yesterday
(actually in FX parlance I am short the US Dollar vs. the Yen) not only due to
this developing scenario, but also due to the solid technical set-up that has
begun to play out. As mentioned in previous columns, when you have a solid
technical pattern accompanied by an intriguing macro back-drop, it is a hard
trade to ignore.
^next^
Consider these macro facts next time you are
chatting with someone regarding the future price of USD/JPY:
– The JPY is
a reflation currency, it historically appreciates when the global economy
rebounds.
– Japan’s recovery is being led by a thriving
export sector (increased exports = need to purchase Yen)
– The JPY
historically has risen when the Nikkei outperforms the S&P 500, as is the case
at present
Naturally, there are risks, foremost is the
possibility of BoJ intervention. However,
it would appear that exporters have fully hedged their currency risk at present
so any immediate appreciation will have little to no impact on profits. In
fact, history has shown that the BoJ will typically “allow” the
JPY to trade in a range for long periods in
order to allow exporters to hedge before letting market forces take the JPY to
the next equilibrium point. The previous level was 105-110, it now seems that
100-105 or even 95-105 are the new lines in the sand.
The second risk is the BoJ raising interest rates
as a way to prevent a blow-off. However, comments by the BoJ indicate that
until there are signs of inflation and no risk to a dip back in economic
activity, a zero interest rate policy will remain in place. You must remember
that the Japanese consumer is still a net saver, as a result the consumer
section of the economy is still somewhat subdued, which of course results in
little pricing pressure.
The more I trade FX, the more I have come to
embrace it. It trades very technically and you can actually gauge the macro
developments without too much concern for the mystery type numbers that many a
stock produce. In addition, they are the ideal compliment to
HVT since they essentially are Swing
and Position Trades that by definition do
not require constant attention and micro-managing.
As always, feel free to send me your comments and
questions.