Japanese yen depreciation here to stay

The yen has had a rough run the past several months as the BOJ enacts easy policies meant to drive up inflation.

The Japanese yen has had a rough run of form in the past several months, as the Bank of Japan has enacted easy policies meant to drive up inflation. The most noteworthy element of Shinzo Abe’s grand experiment is the plan to double the money supply in a period of two years. The massive open market operations already undertaken by the BoJ have slammed the Yen’s exchange value beyond the 100¥/USD mark after a decade spent languishing around the 80¥/USD level. 

Japanese equity markets rallied upon the enactment of the three-pronged policy; soon after implementation the Nikkei 225 jumped above 15,000 for the first time since before the 2008 crisis. Recent catalysts have shown, however, just how shaky the foundation of this growth is. Last week soft numbers out of China and a pullback in American markets resulted in a whopping 7% drop in the Nikkei and high volatility in the yen. The currency has fluctuated against competitors since this event, which evidently shook consumer confidence in Japan, but equities are signaling a recovery. Mr. Abe and his supporters seem adamant in their support for the continuation of the stimulus program. Barring unforeseen weakness in Japanese equities, we must assume that the cash injection will continue and the yen will continue to depreciate relative to its closest peers.

So how can a trader take advantage of a depreciating yen?

Spot currency: This is the cleanest and most direct way to trade the yen, but the capital outlay and swings may be difficult for some traders.

ETFs: The Currency Shares Japanese Yen Trust (FXY) is an ETF that tracks the price of the yen. This ETF does a good job of tracking yen performance, but options on this product can be illiquid at times.

Options on yen futures: The best, most liquid way to set up a trade on risk vs. reward ratio. With an implied move of .000325 by Jun 28th expiration I can now look at trade setup.

Trade: Buying the 6J Jun 28th .009650-.009550 Put Spread for .000025

Risk $312.50 per 1 lot

Reward: $937.5

Breakeven: .009625

 

 

About the Author
James Ramelli

James Ramelli is the Moderator of the Live Futures Options Trading Room at KeeneOnTheMarket.com where he actively trades futures and options on futures while educating members on strategies, setups and risk management. He has a degree in Finance with a focus in Derivatives Trading and Financial Engineering from The University of Illinois and has been trading for five years. James appears regularly on Bloomberg T.V. and BNN and writes a weekly column for Futures Magazine.

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