How to Trade a Yentervention
Aug 24, 2023
Shorting the Japanese yen has been a popular trade for many months now, dating back to early 2022.
Rising commodity prices undermine Japanese terms of trade, which in turn erodes purchasing power for Japanese businesses and consumers.
The Bank of Japan’s ultra-loose monetary policy, backstopped by quantitative and qualitative easing with yield curve control (or QQE with YCC, for short), has meant that the yen has been at a significant disadvantage to its peers in a world of rising interest rates in the United States, Europe, and elsewhere.
The declines in the yen in 2023, particularly USD/JPY spot rates or /6J, have become so severe that we now find ourselves trading right around the November 2022 level that led to the Japanese Ministry of Finance intervening to halt the yen decline.
While yield differentials cater to continuing to short the Japanese yen, having arrived at the prior intervention levels, attempting to trade long USD/JPY spot rates or short /6J may be akin to picking up pennies in front of a steamroller.
There may be two ways, however, to take advantage of a yen intervention–a yetervention, if you will.
Growth concerns are escalating in Europe, as the latest batch of PMI figures show; a recession has arrived in the Eurozone and will continue to get worse over the next few months. This leaves the European Central Bank in a lurch, facing down stagflationary conditions at present time (even though disinflation, if not outright deflation is beginning to show up in the data). Weakness in EUR/USD spot rates and /6E is apparent, even though it hasn’t showed up in EUR/JPY spot rates or a long /6J, short /6E pair trade yet.
If Chinese property market debt issues are accelerating–and they are–then China-proxies will likely remain under pressure as well. The poster child for a China proxy in markets is the Australian dollar, and /6A has reflected the dour sentiment, no doubt. But thanks to yen weakness, AUD/JPY spot rates haven’t moved all that much since early June.The key takeaway: if you’re trying to get exposure to the decline in European growth conditions or the Chinese property market debt bubble bursting, then short AUD/JPY (long /6J, short /6A) and/or short EUR/JPY (long /6J, short /6E) may be the best way to position for it. That's true particularly because such positions would benefit from a yentervention that upends USD/JPY spots rates (/6J), which have arrived back at the November 2022 yentervention level.
Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx
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