Now more than ever, investors who once stuck with stocks are exploring the profit potential in currency trading. That’s due, in part, to the increased unpredictability in stocks of late – as well as a slew of new financial instruments (like ETFs) devoted solely to giving investors exposure to currencies. Today, I want to welcome new forex traders into the fold by unveiling the trade that’s forming in the yen right now…
The timing is right for a play on the dollar-yen currency pair. Both technical and fundamentals are converging and pointing to a crossroads. That’s because the yen is a global “safe-haven” currency that also reflects Japanese growth expectations. So the question before us is, which sentiment is dominant — risk aversion or risk appetite?
Technically, the weekly USDJPY is turning off a recent low of 84.7, which is a key resistance line. The last time the USDJPY pair was here was back in November ’09.
From daily price action geometry, the USDJPY pair has closed two consecutive weeks in a row with a new high. The last time it did this was back in July, when the USDJPY pair reversed from a descent to go back up three consecutive days.
However, fundamentally, at these levels we have increasing chatter that the Bank of Japan (BOJ) will very likely intervene. The last time the BOJ intervened was in March 2004. From a political perspective, a strong yen hurts Japanese manufacturers and exporters, which need to keep prices of their products competitive. A stronger yen means consumers purchasing Sony electronics or Japanese autos have to pay more per unit of purchase.
But extra stimulus is difficult in Japan, since its government debt is forecast to be 250% of its GDP by 2015. And in my view, the Japanese leaders know by now that intervention won’t work.
With these fundamental conditions, the fact that the yen hit a 15-year high last week means we are at a crossroads. And while the market seems to be favoring puts these days, I think going long is a good bet. The reality is that the yen is tied to the dollar, and weakness in the dollar — not strength in the Japanese economy — is the root cause of a dropping USDJPY pair.
So let’s prepare for a bounce in the pair now, and consider playing a fall at a later time.
[Ed. Note: For readers who aren’t familiar with trading currency pairs, yen plays are easily accessible thanks to the emergence of currency ETFs in recent years. Some of the more popular funds include the CurrencyShares Japanese Yen Trust (NYSE: FXY), iPath USD/JPY Exchange Rate ETN (NYSE: JYN), and WisdomTree Dreyfus Japanese Yen Fund (NYSE: JYF).
While each of these funds has a somewhat different investment objective, FXY is the most heavily traded by far, and most liquid.]
Sincerely,
Abe Cofnas
Penny Sleuth
August 27, 2010
[Independence Note: Unlike scores of other penny stock resources, we’re 100% independent from the companies we talk about in the Sleuth – that means that we never accept compensation in exchange for profiling a company, and our editors never own a position in any stocks they talk about.]
A New Tactic for Currency Traders was originally featured in the Tomorrow In Review.