Japanese Yen Spike Was a Blip, But the U.S. Dollar Is Dying Every Day

by: HiddenLevers

The yen’s momentary dip in to 70s (unheard of) is now back above 80. That spike was a total anomaly, as the chart below makes clear, but to many in the highest ranks of professional trading, this was a nail-biter. What does this mean for longer term investors though?


It was a blip, related to the unwinding of the carry trade. The carry trade is when European, Aussie, and American traders borrow in yen, converts it into U.S. dollars, and buys a bond. Since interest rates in Japan are nil, the trader will make the whole profit on the bond, with zero borrowing costs. The caveat – exchange rates between countries don’t change too much. When you can make money this easily, you tend to use leverage. Yesterday, the second that yen spike happened, all those margin calls came in, and bam – snowball effect. The other part of this is that much of the FX world was likely short Japanese currency, and the smart money wasn’t going to just let all those shorts win. If you haven’t figured it out, the color with the least chips on it usually wins. As I had pointed out earlier this week, oil prices have dropped through this energy crisis. And now the yen skyrocketed. Is the Wall Street casino making sense?

Many with their own agenda (here’s a good example) equated this spike in yen to the beginning of the Japanese pull-out of U.S. Treasuries. "Why stick around and lose profits to the unlikely notion that a cash-fueled, jobless recovery in an overly indebted developed world will ignite the reactors of sustainable growth?" Daniel Alpert, Westwood Capital. Well, this is overdoing it a bit, and even though I’m not a fan of QE2, I don’t think the Japanese are chasing the Bill Gross strategy just yet.

Chart created using Hidden Levers app

He does have a point though. I used HiddenLevers charting to compare the USD Index to yen. The spike has literally come and gone, but the US dollar’s descent continues steadily. That is just since the start of the year. Neither the S&P correction, nor high oil prices, nor the Japanese meltdown, has altered this. My boys at Zero Hedge make the argument that since US interest rates are so low, the USD is a carry trade too, and waiting to implode. But just as the yen has almost come back to equilibrium with an 8 handle, so too shall the USD continue its Shakespearean death.

I used HiddenLevers screener to find plays that were inversely correlated to the USD Index, and I stuck with ETFs and Mutual Funds just because I want to make sure all our Advisor friends know we have their back. We are not a just a stock-picking tool! Although Coca-Cola (NYSE:CCE) and Taleo Software Corp (NASDAQ:TLEO) So here are a couple ETFs that should do well as the U.S. Dollar loses its mojo:

iShares MSCI Brazil Index ETF (NYSEARCA:EWZ)
Chart created using Hidden Levers app

State Street Materials Select Sector SPDR ETF (NYSEARCA:XLB)

Chart created using Hidden Levers app

Enjoy the weekend my friends. Spring is here!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.