Play the Yen From the Down Side

 | Apr 15, 2013 | 2:00 PM EDT  | Comments
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Stock quotes in this article:

dxj

,

FXY

The Japanese equity and currency markets have been experiencing sharp moves as the unprecedented monetary easing that first started in the U.S. has spread to its markets as well. With the equity markets up sharply, the yen has taken a sharp slide to the down side. However, with all the monetary easing that the Japanese central bank is planning on doing, any minor correction should be sold off. Playing the yen to the downside is the correct way to go right now. Here is our strategy for how to play the Japanese markets from the equity, currency and commodity views.

Equity:

The WisdomTree Japan Hedged Equity DXJ takes a look at the broad Japanese stock market. It has had a fantastic run since October of last year, rising from around $31 to above $46, for a nearly 50% gain in just six months. Now, this rate of return is just symbolic of this product, as it is a hedged ETF and other products have different compositions and are built in a different manner.

As you can see on the chart below, the price is above the cloud, signaling that the price action is still bullish. It is at a wave 5 Elliot Wave count; thus, the RSI at around 67 is starting to lose a bit of steam. This seems to point to a possible start of a normal correction. The U.S. has clearly shown the rest of the world that pumping billions of dollars of liquidity into an economy does wonders to the stock market. It not only creates inflation in the long run, but lofty expectations of risk and return for stock prices.

Japan is making a statement of more than doubling bond purchases every month; hence, it is trying to end its era of deflation for a two-year goal of 2% inflation. At this point, any pullback should represent a good buying opportunity unless something drastic happens or comes out -- such as the U.S. telling Japan to do the opposite in this recent article.

Source: Yahoo! Finance

Point and figure charts which represent pure price action seem to be in line. Having taken out the past two upward price targets with ease, they are clearly bullish and are hovering right below the next target of $48.25. A correction of some kind could be likely, but should only be used as buying opportunity, as the charts show that the Japanese stock market still has some room to run.

Source: Yahoo! Finance

Currency:

Everyone has been paying a great deal of attention to this market. Take a look at the economic fundamentals that are driving Japan's economy, which can help us put the entire picture together.

Source: Haver

Exports

Retail

 

Source: Haver

Yen 

After looking at some of the leading indicators of the Japanese economy, we can see that GDP stalled and moved lower due to retail sales and exports taking a plunge to the downside. Hence, if you take a look at the exchange rates pegged to the U.S. dollar and the euro, you can see why the yen has been so troublesome lately.

Japan has been in a period of deflation for more than 20 years, and there has been no real growth in the economy as interest rates have stayed near zero for some time. For the Bank of Japan to do something new and follow in the footsteps of the U.S. by allowing a lot of liquidity into the economy means only one thing: Sell the yen. That however, does not mean that it won't have it throwbacks and allow for investors to get in at better levels. The yen has simply come down to far too quickly. For those who missed out, there is another opportunity as any strength should be seen as an opportunity to sell into the yen. This chart of the CurrencyShares Japanese Yen Trust FXY shows that the ETF has fallen very hard and very quickly. It has started to pull back some, but that should just be an indication to sell into the ETF -- if this is the way that you decide to play it.

Source: Yahoo! Finance

Taking a look at the point-and-figure chart (below), FXY has crushed the first two downside targets of $118 and $113. We are now looking toward $94.50. Keep in mind that currencies are volatile and that since this is an ETF, it should be of no exception. Volatility in the yen will continue.

Source: Yahoo! Finance

Commodities:

One other way to play the Japanese market is to buy gold in yen terms. All this liquidity being entered into the economy combined with the Japanese central bank saying it wants to end the era of deflation and wants inflation sets up the perfect scenario to own gold in yen terms.

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