Posts Tagged ‘YEN’

Risk Aversion Not Just an Equities Story: Look for the Yen to Weaken

May 12th, 2010 Michael McDonough Comments off

The AUD/JPY exchange rate, commonly used as a carry trade to take advantage of stark interest rate differentials between the two countries, is also a measure of investor risk.  For that reason it may surprise some of you to learn the cost of the Australian Dollar in terms of the Japanese Yen is tightly correlated with the S&P500’s performance.  Both trades invovle risk, and as investors appetite for risk diminishes so to does demand for equities, while demand investors rush into the Yen to quickly unwind their potentially highly levered carry trades.

Risk aversion has also kept the USD/JPY trading relatively range bound, but improving U.S. fundamentals coupled with Japan’s fiscal weakness could be setting the cross-rate up for a bounce.  I expect that recovering investor sentiment, which will eventually lead to a decline in U.S. government bond purchases, will also coincide with a sharp depreication for the Yen in terms of U.S. Dollars.  The chart below highlights how the relationship between the AUDJPY cross-rate against the USD/JPY rate has broken down since the start of 2009.  I expect that USD/JPY rate will gradually increase to 100 from the current level of 93.25 as confidence returns to the market, and investors begin to digest the extent of Japan’s fiscal weakness.  In fact, with the preface that Japan is no Greece, the country’s finance minister recently announced they wanted to extend the average maturity of Japan’s government debt to reduce its refunding risk.  Japan’s debt to GDP ratio is expcted to hit 227% of GDP this year; Greece 110%… 

AUD/JPY, USD/JPY, & the S&P 500

Source: Bloomberg
Categories: Asia/China, US Tags: , , , , ,

Another Reason to be Bearish on the Yen

January 7th, 2010 Michael McDonough Comments off

Japan’s new finance minister has indicated that he would like to see the yen depreciate ‘a bit more’ after falling 9% from it’s recent high. This is in contradiction to Japan’s recently retired finance minister, and likely means further depreciation for the Yen. I first recommended shorting the yen on 28 October in my piece entitled ‘Positioning Yourself for Japan’s Potential Demise‘, either directly, through derivatives, or the ETF, YCS. I still believe the trade has good upside and a relatively low risk profile.

Categories: Asia/China Tags: , ,

Intraday Major Yen Divergence; Parallel Derisking In Process (From ZeroHedge)

October 29th, 2009 Michael McDonough Comments off

If you enjoyed what I wrote yesterday on Japan and the Yen, you will likely enjoy this intraday update from Zero Hedge:

Categories: Asia/China Tags: , ,

Positioning Yourself for Japan’s Potential Demise…

October 28th, 2009 Michael McDonough 5 comments

-Strong domestic demand for Japanese government bonds has permitted Japan to keep interest rates at or near 0 despite significant increases to the government’s debt burden, with no significant currency depreciation, and almost no economic growth. But, this model may be coming to an end

-An aging Japanese population will have several negative effects on the economy: 1) Higher taxes to fund the country’s pay as you go social security system. 2) Retirees will begin drawing from savings to fund retirements. & 3) Reduced demand for JGB’s will force the government to seek capital outside of Japan, which should lead to a run-up in rates. Any increase in interest rates should have substantial effects on the government’s ability to finance it’s debt.

-The ‘illusion’ of the YEN being a ‘safe-haven’ currency could soon dissipate. Not to mention the aforementioned issues, the bulk of Japan’s economic growth–and decline–has stemmed from the export sector. A strengthening Yen against its trading partners will add further pressure to this sector, and place additional pressure on Japan’s growth going forward.

Take a short position on the Yen versus USD:

*Buy USD/JPY puts

*Short YEN against USD (ETF: YCS)

Open a position to take advantage of anticipated rise in Japanese rates:

*Buy call options on Japanese yields

**For a more detailed look into this topic please see my column posted on’s RealMoney section.


A Brief Global Macro View on the World’s Markets

October 12th, 2009 Michael McDonough Comments off

This is a very short global macro overview of today’s markets. I do not recommend any of the trades mentioned in this report, but hope they help reinforce your own view or help you generate some news ideas.

Monetary policy around the globe remains easy, providing ample liquidity and room for credit growth. Additionally, fiscal policy remains expansionary, and in some regions the full benefits have likely not yet been realized.

In the U.S., I believe we’ll discover that growth returned in the third quarter this year, primarily due to a turning in the inventory cycle (I will go into more detail on this topic in my Economic First Look when GDP is released). While the U.S. is only just returning to positive growth, some developing nations never experienced contraction or have already returned to growth mode. The trend of developing nations outpacing the developed world should continue and provide some potentially profitable investment opportunities, especially in Brazil and China.

But the punch bowl won’t last forever. An eventual resurgence of inflation and massive government deficits will eventually lead to higher rates and limited room for new fiscal stimulus. In fact, on Tuesday the Australian central bank surprised the world by announcing a rate hike to 3.25% from 3.00% on the back of perceived economic strength. Nevertheless, it will take some time — six to nine months — for other governments and central banks to catch up to Australia’s policy stance, leaving markets around the globe ripe for further appreciation.

As market conditions remain favorable for asset appreciation over the next six to nine months, developing nations — especially Brazil and China — will continue to outpace developed nations — especially the U.S. — in terms of economic growth and equity market performance. Therefore, you should consider long positions in ETFs based on the countries; those include iShares Brazil (EWZ) and iShares FTSE/Xinhua China 25 (FXI) .

Both of these countries have strong consumer stories:

* In Brazil, personal consumption has been leading its recovery. The country experienced 2.1% sequential growth in consumption in the second quarter, and the metric is generally anticipated to remain robust into 2010 on the back of easy monetary policy. The Brazilian unemployment rate has already fallen to 8.1% in August from 8.8% in May, and it’s widely anticipated to move between 7% and 8% over the coming months.

* In China, if you are a believer of the burgeoning middle-class story, you may want to look at companies like Zhongpin (HOGS) . Zhongpin is a Chinese meat and food products company, specializing in pork products. Additionally, expected increases in the caloric intake of the Chinese population could provide some opportunities in the global fertilizer and agricultural sector. I view China as a more volatile Brazil, with higher return potentials but also much more downside risk.

Additionally, I am bullish on the currencies of commodity-producing economics, including the Australian dollar, Brazilian real, Mexican peso, Chinese renminbi and Korean won. At the same time, I believe the Japanese yen, which has experienced significant appreciation over the past several months, may be overvalued due to deteriorating fundamentals. One way to play this view is taking a long position in Proshares UltraShort Yen (YCS) ETF.

Domestically, I am somewhat overweight on the U.S. technology sector via ETFs or Apple (AAPL) as a single name. It will also be interesting to monitor whether Verizon (VZ) is able to end AT&T’s (T) monopoly on the iPhone. Apple’s contract with AT&T is set to expire in June, and analysts are mixed over whether Verizon can expect to add the product to its line.

I am still somewhat bearish on the U.S. housing sector as foreclosures and mortgage delinquencies across all types of loans continue to weaken the sector. Moreover, the first-time homebuyer tax credit program is set to expire at the end of November; that incentive doubtless had an impact on recent home sales. Continued weakness in the housing sector may place some downward pressure on U.S. REITs.

The show won’t go on forever. A return to growth coupled with fears of economic overheating will cause central banks around the world — likely starting with emerging markets that have already returned to growth — to tighten monetary policy. While at the same time, developed nations will face the repercussions of swelling budget deficits. In Brazil, like in the U.S., monetary policy is expected to remain unchanged for most of 2010, which should provide further support for domestic assets.

In the near term, the biggest downside risk to this investment the possibility that central banks may tighten monetary policy prior to current expectations. But tightening is inevitable; rates in the U.S. will not remain at 0% forever. Once it becomes clear that central banks are approaching a tightening cycle, investors should consider taking profits on their equity positions. Ultimately, higher budget deficits in the U.S. combined with potentially momentous health care reform could lead to higher taxes and rates, coinciding with a period of subdued growth and elevated unemployment.

For more please see my column on