Land of the Rising Yen
Fundamentals
December Yen futures are trading at 8-month highs, as traders are starting to look at the U.S. Dollar as the new “funding currency” for so called “carry trade” positions. The Yen was the previous favorite for funding these trades, as its low interest rate environment and bearish demographics allowed traders to borrow in Yen to invest in higher interest rate environments such as Australia, New Zealand, or Brazil. However, with little signs that the Federal Reserve will alter its position on keeping interest rates low to nurture a tenuous economic recovery, many investors are now using the “greenback” in place of the Yen for the sell side of “carry trades”. The rise in the Japanese Yen vs. the U.S. Dollar has taken many traders by surprise, causing continued short-covering by speculators. This was helped in part by statements by new Japanese finance minister, Hirohisa Fujii, last week that traders interpreted as an endorsement for a stronger Yen. The Yen’s recent strength is causing serious issues for many Japanese manufactures, who prefer a weaker Yen to make its exports more competitive. If the value of the Yen were to continue to rise, the Japanese government, now led by recently elected Democratic Party of Japan (DPJ) leader Yukio Hatoyama, would feel serious pressure from Japanese corporations to potentially intervene in the interbank market to weaken the Yen to prevent a potentially serious economic slowdown of an economy dependent on exports. Though the DJP is not keen on the idea of government intervention in the currency markets, the Yen’s new-found strength may force the government’s hand sooner rather than later.
Trading Ideas
Although the current trend for Yen futures is bullish, the possibility of government intervention to weaken the Yen must be in the back of the mind of every Yen bull. Given the possibility of a big price move in either direction, some traders may choose to investigate trading strategies that will benefit from an increase in volatility. An example of one such trade would be the purchase of strangles in Yen futures options. With the December Yen trading at 1.1192 as of this writing, the December 1.15 call/December 1.08 put strangle could be purchased for 2.74 points, or $3,425 per strangle before commissions. The premium paid would be the maximum loss on the trade, and the position would be profitable at expiration if the December Yen is trading above 1.1774 or below 1.0526.
Technicals
Looking at the daily continuation chart for the Japanese Yen, we notice the market has been in bullish control since early April; however, the real strength in the up move has only occurred since the beginning of August. Notice how prices have held just above the 20-day moving average ever since we saw a bullish crossover of the 20-day MA over the 200-day MA. The 14-day RSI has just moved into overbought territory, and a bearish price correction is not out of the question given the just over 10-handle move we have seen the past several weeks. 1.1500 is seen as the next major resistance point for the December Yen, with support found at the recent lows near the 1.0800 area.
Mike Zarembski Senior Commodity Analyst
