HedgeFundLIVE.com -- The Japanese earthquake has hit every global market 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. All of these strategies bet on USD strength and counterpart weakness.
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. To the right, is a chart of the AUD/USD pairing, it has typically reached resistance near parity $1.02, 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. In the long-term, the Loonie will strengthen based on oil prices and that it can be an OPEC competitor (if there is such a thing).
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. All of these strategies should be played against the USD based its forecasted strength. The USD should see strength mainly due to Euro weakness, US economic strength, and risk-averse investing.
If you make any profit off of these strategies, please feel free to donate to Japanese relief.