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Jeremy Frommer, CEO of Hedge Fund LIVE Jeremy Frommer has 20 years of industry experience and is currently responsible for general management and leadership of the General Partner. Previously, Mr. Frommer was a Managing Director and Head of the Global Prime Services Group (“GPS”) at RBC... More
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  • Japan Earthquake: Currency Trading with Yen, Aussie and Loonie  0 comments
    Mar 15, 2011 10:55 AM
     HedgeFundLIVE.com – The Japanese earthquake has hit all markets at this point, including the currency markets. Japan is the world’s third largest economy according to the IMF, just behind the US and China. The country itself is a volcanic island, which means natural resrouces are limited, by default such a large economy must also be a natural resource importer. Major imports include iron ore, bauxite, and aluminum. This all means that a near-term collapse (it won’t be permanent) of the Japanese economy will spell trouble for the Yen and for commodity currencies like the Aussie and Loonie. Following are some ideas, to play against the USD, not each other.

    Australia is one of the world’s largest natural resources exporters and Japan is one of its biggest clients. Australia exports massive amounts of iron ore to Japan, to be used by auto manfucturers like Honda and Toyota. A massive setback in the Japanese economy will cause the Aussie to relatively weaken. The Aussie is already dealing with downward pressure from massive flooding in January. Look for weakened numbers to hurt the Aussie in coming months. Below is a chart of the AUD/USD pairing, it has typically reached resistance near parity over the last few months and shot down. Expect to see more of the same.

    The Loonie, is another example of a commodity currency. Canada is a huge exporter of lumber, oil, and other natural resrouces. It should be noted that the Canadian economy does not have outstanding problems, like Australia’s floods, so the weakness here won’t be as dramatic. When investors become risk-averse money tends to flow from commodity currencies to safe-havens like the USD. Lately, the Loonie has had similar price action with crude oil. Look for the Loonie to struggle this week, however, world oil demand isn’t changing drastically, so there shouldn’t be long-term weakness.

    The Yen, should weaken overall. The Japanese economy will be crippled for at least a few months. An article on Bloomberg states:

    “The Bank of Japan injected 5 trillion yen ($61 billion) into money markets today to secure financial stability after the March 11 temblor, the country’s strongest on record, and ensuing tsunami. The central bank also said it will offer to buy 2 trillion yen in Japanese government bonds through repurchases.”

    Typically when a central bank injects money into an economy the currency weakens in the short-term. This tactic will also battle deflation problems that have been a nuisance for Japanese bankers, as the easing tends to spur inflation. Hopefully the quick action by the Bank of Japan will help.

    If you make any profit off of these strategies, please feel free to donate to Japanese relief.

    COME JOIN OUR LIVE BROADCAST MON-FRI 8AM-5PM AT HEDGEFUNDLIVE.COM PICK A CHANNEL AND GET CONNECTED.

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