After yesterday's announcement that Japan's Prime Minister Shinzo Abe would be seeking the employment of Haruhiko Kuroda, his most inflationary pro candidate for governor of the Bank of Japan, one would have expected increased pressure on the yen when markets opened. And it happened! The yen surged to yearly highs of 94.77 JPY/USD at the start of trading sending FXY to yearly lows of $104.14 per share and almost launching YCS past the $60 ceiling it has been flirting with. On the sidelines, one can only imagine the good mood George Soros and Kyle Bass had as they rolled into work. Everything was looking up for short sellers until around 10:00 AM Eastern time when Mr. Market started having second thoughts.
In what can only be described as a normal spot on a weird day, all the energy it took to raise the JPY to 94.77 per USD was turned in the opposite direction as it fell close to 3% to where it currently sits hovering around 92 per USD. This dramatic drop though, in my opinion, can only be attributed to profit takings. The yen has risen over 20% in the last few months and it's hard not to wonder at what point short sellers were going to start putting some earnings down on paper. It's in times like this, that one needs to ponder three crucial questions.
1. Has anything really changed?
2. If not, do I have the stomach to hold on?
3. Is this another buying opportunity?
Everyone gets tested at one point or another while investing and one sure way to test someone is by sending a signal that money on the table is about to disappear. It is always a good time to reevaluate! Under this assumption, yesterday should be looked at with one thing in mind.
Nothing underlying the JPY really changed.
The news of a prime minister who wants to print money and inflate prices seeking to elect a bank governor that also wants to print money and raise prices doesn't change anything; it might not even happen. And, the market making a sharp move in either direction doesn't change anything; it kind of likes to do that. What is important to note is that Japan woke up with the same problems today that it had yesterday. Now is a good time to reevaluate positions, but, anyone stepping in for the first time really needs to be ready for a bumpy ride.
Ways to play this:
1. Going long YCS, which tracks double inverse to the Japan yen is probably the safest of the bets out there. You can hold it as long as you would like and since none of the economics out there indicate any strengthening of the Yen, downside could be seen as somewhat protected.
2. A little less risky would be buying long (2 year) puts for FXY. I put this above option three below on the risky side because you can buy two year options; number three below only allows for up to six month long bets.
3. Buy YCS Calls. Again, these can't be purchased that far in the future so risk/reward here is the highest. There is no real telling how fast or how far the Yen will fall.
As always, good luck, and please don't gamble with what you can't afford to lose.
Disclosure: I am long YCS. I also have Long Puts for FXY and Calls for YCS.