With all of the attention brought to the yen by its outspoken leaders, it seems many looking at the problems in Japan lose track of the fact that its value to the dollar is a two-way street. But, the dollar is not only strengthened by Japan's weakness, its value will rise in part to its own fundamentals.
As reported by REUTERS yesterday:
A number of Federal Reserve officials think the central bank might have too slow or stop buying bonds.
This announcement was quickly reflected in sharp drops in the DOW Jones Industrial Average, S&P 500, Euro, and...
Sorry one second, I though I put the yen somewhere but, nope, the yen strangely increased after this announcement. One may argue that this was due to Japan's Prime Minister Shinzo Abe's own pronouncement that Japan would not need to resort to buying foreign bonds but this surely is just a slight of hand. After the G20 meeting last week, Japan was awarded a green light for its fight against deflation while other monetary weakening moves would not be tolerated.
Speaking of slight of hand, did you hear the Japan Ministry of Finance just recently announced close to a 6.4% increase in exports earlier this week? Pretty good right? I guess old Abe's formula for a weaker yen is paying off, it certainly has increased exports. Too bad the rise in other countries' prices led to a 7.3% increase in imports, resulting in a record unadjusted trade deficit for January of ¥1,628.4 billion (approximately $17.5 billion). Can anyone smell the money printing in the air? Just wait! If Japan isn't going to be purchasing foreign bonds you can be sure that it will only be printing that much more money.
While there are quiet rumblings about a bond bubble and in the midst of what seems to be an unwarranted gold fire sale one thing is for sure, the slowdown on the yen's fall seems to be just another small calm before the storm. Mr. Abe can say what he wants anyway that he wants but, all concrete data shows ever-increasing problems for Japan. I can only imagine the smile George Soros and Kyle Bass are sporting now.
As I previously reported:
How to play this?
1. Buy YCS, Proshares UltraShort Yen ETF
This ETF has moved from 52 week lows to 52 week highs recently with seemingly more to come as its performance moves inverse to that of the yen.
2. Buy EUO, Proshares UltraShort Euro ETF
This ETF sits near 52 week lows as it moves inverse to the Euro, which is near 52 week highs. This play may be a little early as Mr. Market is currently of the opinion that the Euro is a safe bet but, any change of opinion will transfer gains to EUO's holders.
High Risk/Reward Plays
1. Buy FXY Puts
FXY moves with the yen so long puts can be purchased to benefit from future declines.
2. Buy YCS and EUO Calls.
These bets are sure to yield a bumpy ride so only speculative amounts should be placed. Remember, you can only lose what you put in and you shouldn't bet more than you can afford to lose…these are strange times. If you don't believe me, check out demand vs. the price of gold (GLD)!
Additional disclosure: I also have FXY Puts and YCS and EUO calls.