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Commodity hedged play against the Yen

Apr. 04, 2011 10:40 AM ETUSD
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skitalo's Blog
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Seeking Alpha Analyst Since 2009

Independent trader and small scale investor, my main interest lies in Forex and divident stocks. I have personally lived through and profited from hyperinflation in the past and would hope to repeat the same in the current and coming situation. I am a swing trader and use a hedged system to trade on technicals, while mostly trying to trade in sync with fundamentals. I mainly trade FX, concentrating currently on EUR/USD, EUR/JPY and USD/JPY

I had been looking at the Japanese Yen for a few months with the view of going short at some stage in 2011, based on a number of fundamental criteria.

While Japan does hold a massive amount of foreign currency reserves and had until recently a vibrant and well oiled economic machine, its ageing population, government debt and stagnant stock market, in addition to a currency which had risen high above the rest on a 'safe heaven' mantra,  were things that were flashing the red light of a potential opportunity to me.

The bottom line being that no currency can do this for too long in a world engaged in competitive devaluation without consequences for the responding economy, particularly if it is an export-driven one.

I was also aware that major earthquakes have happened on average during every eighty years of the Japanese history. Japan was therefore likely "overdue" (if one could use this term) for one, although of course no one could have predicted when this might happen and how sadly devastating and long-lasting the consequences would be.

I was holding off until the end of April, when I thought a short position in the Yen, would have the benefit of being in sync with the seasonal trends and would avoid the risk of my stops being triggered due to repatriation of foreign assets by Japanese corporations.

When the Earthquake happened and the resulting Tsunami caused  massive devastation, I thought at first (like many others) that the resulting repatriation would likely be contrary to my trading idea, but the following nuclear disaster changed my view altogether and made me pull the trigger.

Fundamental Reasons for the trade:

1. Yen at or near all time highs versus other major currencies and a destructive Yen-bear onslaught on the 16th of March - Please see charts bellow.

2. Major nuclear disaster in Northern Japan with no outlook of abating in the next few months - these things tend to last a while.

3. Energy shortages prognosis in a highly industrial and export driven economy.

4. Infrastructure devastation and resulting revised prognosis for growth (or lack thereof), since repairing destroyed infrastructure should actually be discounted from GDP figures.

5. Central Bank supportive of the FED policies and strategy. Depressed US dollar versus the Yen and Commercial accumulation of the US dollar.

6. Expectations and fundamentals favoring a higher oil price near term due to continuing unrest in Bahrain, Lybia etc.

7. Expectations for ECB rate hike (albeit a minimal one).

8. Commercial (and or ETF) accumulation of Silver and price breakout  (please see chart bellow), combined with limited supply fundamentals.

In view of all of the above, I decided that the safest way of shorting the yen would be via more than one currency and while hedging my shorts with a long silver position at this level.

I therefore initiated a USD/JPY, EUR/JPY and CAD/JPY and hedged with a long Silver position, adding to positions gradually, once I was confident that the wind is blowing in my back.

So far it seems like this is a winning strategy and my fundamental view has been confirmed by the markets.

I accumulated gradually my desired amount of positions and intend to hold this hedged set-up for a few months to a year, or until the situation looks close to being resolved in Japan.

Downside: the main danger is a big rally in the Yen.
Should this happen to be the case, presumably my Silver hedge should keep things under wraps, because such a rally would most likely happen at the expense of the US Dollar (the main part of Japans foreign reserve holdings (about $800bln worth are held in US Treasuries.
Equally, if we see correction in the price of Silver, it would probably be accompanied with a USD rally, most likely against the Yen (both are the lowest yielding major currencies in the world). 

Considering the Yen moves after the Kobe earthquake and the Chernobyl experience, I reckon that we will not see a long-lasting Yen rally at this stage.

The rebuilding costs are already estimated to be several hundred billion dollars.
The compensation law-suits are estimated to run into tens or even hundreds of billions of dollars and it is difficult at this stage to estimate the costs of decommissioning the Fukushima plant.  
TEPCO's liabilities (or part thereof) would most likely be socialized and duly monetized, similarly to the Bank failures of the recent past. 

USD/YEN Weekly
USD/YEN Weekly chart

EUR/YEN Weekly

CAD/JPY Monthly

Silver Daily
Silver Daily


Disclosure: I am long TBT.

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