Japanese Yen ETF Stands Tall Amid Global Carnage

The Japanese yen ETF (FXY), a recent ETF Pick of the Week, had an extraordinary surge on Monday as the flight by investors seeking safety from the crisis engulfing global financial markets moved to the next level. Since the start of July, the yen has gained almost 44% against the Australian dollar and 30% against the kiwi.

The Japanese currency jumped 5.7% against the euro, its largest one-day gain since the European single currency started trading in 1999. It also surged 4.2% against the US dollar, its strongest one-day move against the buck since October 1998.

“There has been a high correlation between the performance of the yen and signs of financial stress,” said Colin Asher, senior economist at Nomura as reported by Chris Flood of the Financial Times.

Although the Japanese economy is currently in recession, analysts appear more upbeat about the outlook for Japan than other developed economies. The fact that Japan already went through its own financial crisis a decade ago and that its banks are perhaps the healthiest in the world are the twin engines fueling its safe haven status.

Goldman Sachs said that Japan was probably best-placed to lead the advanced economies out of the slump after completing the process of balance sheet restructuring, which has made it less vulnerable to the credit crunch than the US and Europe.

Steven Barrow, head of G10 strategy at Standard Bank, said: “The yen is going to be the strongest currency in the world.”

As I mentioned as my ETF Pick of the Week summary, the catalyst for the yen surge is the unwinding of “carry trades” where funds borrowed in Japan at low interest rates are invested elsewhere.

Comments

[ICouldBeWrong]

Does anyone have any critical comments about the Yen?

I moved out of hard assets and into the Yen when I realized Bernanke isn't monetizing the debt, and that the debt won't be monetized until the administration is changed if ever (which is very bullish for US dollar).

[ICouldBeWrong]

No replies so I'll explain further. The Fed is not monetizing the debt, they are not 'printing money' like many on the internet think (especially gold bugs). Instead they are borrowing money from foreign countries, Japan, China, Saudi etc. They have been borrowing a lot for many years.

It's like someone getting a credit card and living off large cash advances. Until the limit is reached cash is freely available and inflation is high. But when the limit is reached (now) cash becomes extremely scarce. So USD will continue to rocket higher against most currencies, the JPY being perhaps the sole exception.

Now the Japanese are very wealthy (unlike the Japanese govt which is in debt), and are invested all over the world. They aren't reliant on commodity exports or in truth even manufactured products they are simply wealthy. So a worldwide depression and falling commodity prices won't hurt them so bad, in fact it will help them relative to other countries. Additionally as foreign markets go down (and get ready for a big '87 style finale crash when the markets open again Wednesday New York time) the Japanese will repatriate their wealth out of foreign currencies back into Yen.

There are many other factors too, Yen carry trade unwinding, Japanese interest rates at rock bottom, see also Jim "everyone should own some Yen" Rogers.

So a crash is relatively good for the Japanese. (And you can work out other things like during the big crash coming this week, gold may rise but afterwards it will fall like other commodities have been as panic subsides and the USD stays surprisingly strong).

Can anyone see any risk to say going short the AUD/JPY pair? Currency controls? Anything else? The daily interest is a high that's the only downside I can see, wait until USD/JPY breaks 100 any day/hour now. Then the Yen will really soar.

www.reuters.com/articl...

[ICouldBeWrong]

Aaah a combined central bank rate cut that's a risk to shorting aud/jpy

"and get ready for a big '87 style finale crash when the markets open again Wednesday New York time"

Well maybe not now, have to wait and see.

[ICouldBeWrong]

Well very lonely in the Yen but terrific profits.

I guess it's time to start rotating out of the Yen and into a short gold / long airlines position now.

[phdinsuntanning]

ICouldBeWrong, almost perfect timing....

[ICouldBeWrong]

phdinsuntanning: Thank you. I'm amazed anyone noticed.

stockcharts.com/h-sc/u...=$XAL:$GOLD&p=D&am...
75% profit in 10 days.

Actually I'm very ignorant about airlines. I'm just researching their hedge positions now.

I must try to be more humble, stay flexible. Time to take profit or not? Something surprising is always around the corner. 12 hours until the currency markets open.

[ICouldBeWrong]

Closed my long airlines short gold trade for now. Taking a holiday.