Yen Breakout: Bad News For Japanese Stocks And The Dollar, Good News For Gold

Includes: EWJ, FXY, GLD, UDN, UUP
by: Daryl Montgomery


The Japanese yen is rallying and this has ramifications for other assets.

When the yen rallies, the U.S. dollar usually goes down, and this is bullish for gold and commodities in general.

When the yen is bullish, Japanese stocks are usually bearish.

The big news on Thursday, April 7th was the soaring Japanese yen (NYSE:FXY). This has important implications for investors both inside and outside the country. As the yen broke out, the U.S. dollar (NYSEARCA:UUP) was breaking down technically, and this will in turn affect the price of any number of assets, especially commodities. Spot gold was up approximately $20 an ounce on the news. The asset most susceptible to changes in the yen is Japanese stocks (NYSEARCA:EWJ), however. They have moved in the opposite direction of the currency for years.

The yen was up as much as 1.7% in morning New York trade on the 7th (a huge daily move for any currency). At the same time, the U.S. dollar fell to nearly an 18-month low against it. While this move received a lot of media attention, the yen rally actually started in the beginning of February as can be seen in the chart of the ETF FXY below (the higher the price of FXY, the more valuable the yen is versus the U.S. dollar).

Japanese Yen 6-Months Price History

YEN 6-months daily 040716.gif

The sharp move up on April 7th means the yen may need some sideways movement for a while to consolidate its recent rally. While the bullishness in the currency could last many months, this doesn't mean it will go up every day. There is certainly an intermediate uptrend in place, if not a long-term one.

A rising yen is a strong negative for Japanese stocks as can be seen in the 5-year weekly record of the returns of the two assets below. This inverse correlation predates five years though and is not likely to disappear in the foreseeable future (if at all). The black line represents Japanese stocks and the gold line the yen. It can be seen clearly that when one goes up, the other tends to go down.

Five-Year Weekly History of Japanese Stock Performance Versus the Yen

The inverse relationship between the yen and the U.S. dollar also tends to be very strong, with the exception of the Credit Crisis in 2008/2009, when both went up because they were viewed, at the time, as safe havens. In almost all cases, a rising yen also means a falling dollar. So, a bullish move in the yen should make dollar holders cautious. A ten-year history of the yen and dollar are shown below. The Credit Crisis period is shown in a red circle.

Ten-Year Performance of Yen Versus the Dollar

If the yen and the U.S. dollar tend to move in opposite directions, this indicates that a rally in the yen is good news for gold (NYSEARCA:GLD). It has long been recognized that the dollar and gold move in opposite directions (although there can be periods of more than a year when they both move together, but this is rarely reported by the mainstream media). While gold and the yen tend to move in the same direction, gold is much more volatile than the yen.

The rally in the yen is just another confirmation that the U.S. dollar is weakening. This is a positive not just for gold, but for commodities in general (one of many that indicate that commodities are probably in the early stages of a long-term rally). Holders of Japanese stocks need to be cautious because a serious downturn is in prospect. Although, there are a number of currency-hedged Japanese stock ETFs, these may not provide adequate protection. Traders may wish to look at the Japanese market as a shorting opportunity.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.