Fears of Global Recession Support Long Exposure to the Yen

The Rydex Currency Shares Japanese Yen Trust (FXY) has resumed its short-term uptrend after successfully testing support at its 34 day moving average last Tuesday. The FXY retraced slightly more than 50% of its move from its August lows to October highs. Thursday it closed at 102.12. A full 62% retracement from its recent low at 99 would take it to 105 while a 100% retracement would send it back to 108.79.

Market fundamentals are such that analysts at Deutsche Bank, UBS, and Barclays predict that investors will reduce exposure to the carry trade even if the BOJ decides to intervene with interest rate cuts. Fears of a global recession will likely cause more deleveraging and amongst institutions, the Japanese are reputed to have the least exposure to the current credit market crisis.

Thursday’s massive 150 bps rate cut by the BOE, along with the ECB’s 50 bps and anticipated further reductions, has the smell of blood and fear. No one expected such a move of this magnitude and it signals much more time will elapse before central bankers can even think about tightening. This also supports long exposure to the Yen.

For those who are more risk averse and/or patient, the FXY is also optionable and one could consider selling the December 99 puts and hedging with a stop loss order equivalent to the assignment price less the premiums for a potential break even or minimal loss.

Disclosures: None

Comments

[Mowog:]

Here in Japan, people are queueing to convert yen into other currencies to convert back later. They assume this is a short-term thing. Some of us recall back in '94 or '95 when it went to $1=¥88. "Experts" on CNN assured us it was going to ¥50. Ha.

2008 Nov 07 09:04 AM

[Market Folly:]

completely agree. i track numerous hedge funds on my blog and as the deleveraging and unwind of carry trades continue, the yen has a very bullish case here. obviously the wild card is the bank of japan here, as they want to keep the yen lower for their economy

www.marketfolly.com

2008 Nov 07 09:46 AM