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The Complex Japanese Yen

japanese yen

Trading foreign currencies in the derivative markets is not an easy pie to devour. As a lone individual trader along with many others, you have to compete with well-established banks, trading houses and other financial institutions that have developed years of experience in trading currencies. You cannot hope to make gains while you remain uninformed. To be successful you must benchmark the way operations take place in well-established players of the market.

This means that your fundamental knowledge must cover the basic and major aspects in your analysis; as such big players do it. The knowledge includes current economic data of the country, the effects of dynamic interaction between economies and any other unique elements affecting currencies.

The Japanese Yen is among the eight most traded currencies of the world. These eight currencies account for more than 80% of the global trades. The Bank of Japan, mandated to monitor JPY, faces damning problems when it comes to stabilizing JPY. It has to keep interest rates lower to allow its exports to run, to spur growth and fight deflation and to keep employment figures up.

You need to dig more in to Japanese economy to trade JPY successfully. From being oldest economy in the world to being the leader in electronics, automobile manufacturing and ship construction, Japan still lacks the energy to give it a strong economic growth. For most of the past decade, Japanese economy has lingered at meager growth rates, up to 2% at max and sometimes even contracting. Since the burgeoning economy of China started to overshadow global economy, Japan with its dwindling fertility rates and older workforce has to rely more and more on economic partnership with regional powerhouses such as South Korea.

You also need to understand that many countries around the globe, particularly in Asia, keep large reserves of Japanese Yen to help them in import Japanese goods and meeting trade obligations. That said, Japan generates huge trade surpluses and altogether garners a lot of positive strength for its currency. At the same time, Japanese economy is heavily entangled in domestic debt. Its domestic nature of debt, that does not create alarm bells with the traders; however, it has caused political turmoil in the country.

There are specific elements that drive the demand and supply of the JPY in foreign exchange market. Just like the consumer / business confidence report is released in the USA, the Bank of Japan issues Tankan Report every quarter which explains the Japanese business mood. The Japanese stocks and trading are particularly responsive to this report. Second major driver for JPY is the carry trading carried out by Bank of Japan. The Bank of Japan offers its own currency to traders around the globe, to enable them to benefit from other high yielding currencies, against some premium of course.

Among other important aspects, affecting Japanese stock and currency are the natural disaster the country faces. It has been affected countless times with powerful earthquakes, hurricanes and even tsunamis.

If you are a long-term trader, such fundamental information is beneficial for you. However, even the short-term traders must know, what actually is going on behind a currency when they attempt to explain price bars with technical tools.

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By Free Forex trading – intellitraders.com

How to Make a Killing in the Yen

Japan Is About to Cry “Uncle!”

Make a Killing as Japan
Intervenes in the Yen Once Again

By Sean Hyman, Editor, Currency Cross Trader

Everyone wants to stay competitive.

Target wants to keep their prices somewhat in line with Wal-Mart. Burger King wants to keep their pricing somewhat in line with McDonalds. Otherwise, they lose customers to their competitors.

The same thing happens in the currency world.

All throughout Asia, many countries do tons of business with the U.S. and Europe. These Asian exporters have to keep their pricing somewhat in-line with each other.

Otherwise, their big export customers in Europe and the U.S. will do their shopping elsewhere.

How does a whole country keep their pricing competitive? Easy. They keep their currencies valued about the same.

An Overly Strong Currency
Can Destroy an Economy

If a country doesn’t manage their currency, their major export goods will start looking “expensive” to the rest of the world. If that happens, their best export customers will look elsewhere for cheaper goods.

This wreaks havoc on export countries.

Businesses slow down. Companies lay off workers. Unemployment levels eventually rise. It also slows down that nation’s overall growth.

So there’s a lot riding on these countries to “get it right” and keep their exchanges rates somewhat in-line with one another. Otherwise, they lose business to another exporting country who managed their exchange rates more effectively.

Japan is one of the Asian exporters that occasionally loses its competitive edge in the global market.

It’s all because of the Japanese yen.

The Japanese yen is seen as a “safe haven” currency. So when stock markets drop, or disaster strikes in some part of the world, traders pile into the yen and force it to climb against the dollar. Suddenly Japan loses its competitive advantage.

To make matters worse, Japan is a big export country. Japan has big-name exporters like Toyota, Sony, and Panasonic. Each of these exporters stands to lose billions in business as the yen strengthens in value.

So it’s no surprise that these companies scream at the Bank of Japan to do something when the yen gains in value.

They demand the Bank of Japan (BOJ) “intervene” in the currency market to force the dollar to rise against the yen. They want to push the USD/JPY exchange rate up enough to get the U.S. to buy Japanese goods again.

What Intervention Looks Like

To intervene in the markets, the BOJ must sell the Japanese yen aggressively in the market to try to manipulate the yen’s price.

The Bank of Japan did this back in 2004 for instance. They were very successful in the short-term. Check out the chart below, and you’ll see what a “currency intervention” looks like.

Japan Intervened Twice in 2004!

Click here to view larger image

As USD/JPY goes lower on the chart, it means the dollar is dropping like a rock, while the yen gets even stronger.

So when the central bank intervenes, the Bank of Japan dumps Japanese yen and buys up dollars as quickly as possible. That tends to shoot the USD/JPY higher on the chart, at least in the short-term.

For example, in February 2004, the Bank of Japan intervened in the markets and pushed the dollar up 6.71% against the yen in just 12 days. That’s an unleveraged return.

However, even with a modest 100-to-1 leverage, you could have made over six times your money in the Forex market.

Even without doing the math, you can see Forex traders made a killing in 2004, simply by buying the USD/JPY. (In effect, just following the BOJ’s lead.)

For the Forex traders out there… that was a move of over 700 pips. So if you were trading five mini-lots, you would have made $3,500. Trading 10 mini-lots, you would have made $7,000.

In April of 2004, the central bank dug their heels in and really taught the USD/JPY short sellers another lesson.

They intervened in the market and forced the USD/JPY pair to climb over 1,100 pips or 11.05% in under two months. So if you had bought the pair, you would have potentially made $1,100 per mini lot traded in the Forex market.

Now the Bank of Japan doesn’t intervene in the market very often. In fact, they didn’t intervene again until September 2010. Then they did again in March of this year.

The Bank of Japan is at it Again!

Please click here to view larger image

As you can see from the chart above, the Bank of Japan has intervened twice in the past year. The Bank of Japan intervened by themselves in Sept. 2010 as they typically do.

But in March, earthquakes, tsunami and a nuclear incident made the yen stronger than ever, as traders rushed for the safe haven. That caused many G-7 central banks to join in on the party…and all intervene in the yen at the same time.

That forced a much larger leap in the USD/JPY as you can see above.

The Strong Yen is Back in
the “Intervention Zone” Yet Again

Well, that “stubborn yen” has continued to strengthen yet again. Right now, we’re right in the middle of the intervention zone (the green area), where the Bank of Japan typically intervenes in the currency.

That means it’s very possible the Bank of Japan will intervene again to push up the yen’s value. Now there’s no way to know if they will intervene tomorrow, or next month, or later this year.

But as a trader, I know those Japanese exporters must be crying uncle now. That means I’m watching and listening for any whisper of another intervention.

I know it’s coming. It’s just a matter of when.

They could intervene tomorrow, considering the USD/JPY exchange rate has hit the 78-79s (as of this writing). Or they may wait until the USD/JPY hits the 76 level like last time. Or they could even wait for a new all-time low before they act.

But honestly, I don’t care when they intervene. It’s more of a question of reacting when they do.

Once you hear about an intervention happening, there are some serious profits to be made, simply by buying the USD/JPY pair in the Forex market.

And as a long-term investor, you can short the yen in the short-term with a simple ETF.  Again, it’s as easy as shorting the yen at the proper time.

Bottom line: an intervention is coming soon. When it comes, you can make a killing simply by following the Bank of Japan’s lead and shorting the yen.

Have a Nice Day!

Sean Hyman
Editor, Currency Cross Trader

Time to Short the Japanese Yen

A Crash Course in Trading the Japanese Yen

(…And Why Now is Perfect Time
to Short this Currency)

Sean Hyman, Editor, Currency Cross Trader

When I first came over from the stock market to currencies, let’s just say I needed a lot of help. I didn’t know the first thing about trading currencies.

So I needed something that would give a “stock guy” an edge in the currency market.

After a little digging and some testing, I found a strategy that has worked for me for over a decade now. This strategy helped jumpstart my career in the currency world.

Even better, this strategy helped me overcome the hesitations some traders have about trading the confusing “odd currency pairs” that involve the Japanese yen.

Right now, the stars are aligning that will make this Japanese yen strategy even more profitable than usual.

To put this technique to work for yourself, you have to know a few things about Japan’s economy first. Let me explain…

The Secret to Trading the Japanese Yen

As a trader, the first thing you need to know is Japan is a major exporter. Some of the more famous Japanese exports include Toyotas, Hondas, Nissans, and Sony electronics.

As a major exporter, Japan’s overall stock market does well whenever Japanese companies sell lots of cars, electronics, cameras, etc. On the flipside, stocks tend to slump when these companies are selling less.

The cost of these goods determines how much these exporters sell on a daily basis. But the cost is a bit relative – it’s really how foreigners perceive the cost.

Much of this boils down to exchange rates. In other words, if the Japanese yen seems cheap compared to your home currency, then Japanese goods seem cheap because your money goes a long way in buying Japanese goods.

However if the yen is strong, then these goods appear to be very expensive. As a foreign buyer, you’re likely to buy less.

This is why the Japanese yen and Japan’s Nikkei Stock Index have an inverse correlation to each other. When the Japanese stocks drop in value, the yen tends to rise against the dollar and vice versa.

We are seeing this exact set-up right now in Japan. As you can see below, the Nikkei just broke out higher. That means now is the time to be shorting the yen pairs. Check it out below.

Japanese Stocks Break Higher…So the Yen is Starting to Fall Again

To make this even simpler, the Japanese yen tends to be listed second in currency pairs. For instance, if you trade the dollar vs. the yen, you use the symbol USD/JPY. The euro vs. the yen is EUR/JPY, and the Aussie dollar vs. the yen is AUD/JPY.

Therefore, as the yen goes down, it pushes these pairs up. That means as the Nikkei goes up these pairs will tend to rise overall too!

As I mentioned, I first caught on to this stock/currency correlation as a young currency trader. Ever since, it’s been much easier to trade the Japanese yen pairs.

You can see how this correlation is working below. As Japanese stocks fall, the Aussie dollar is dropping at the exact same time compared to the Japanese yen. In other words, the yen is rising in value against the Aussie as Japanese stocks fall. Take a look…

As the Nikkei Breaks its Downward Correction…So Does AUD/JPY!

This tip can take you a long ways in your currency trading before you know anything about the macro economics of any of these nations.

You really don’t have to know too much about currency trading to pick up on this correlation. You just need to recognize that when Japanese stocks pick up steam and trend higher the Japanese yen is likely to fall.

That’s all you need to know in order to profit!

Here’s Why NOW is the Best Time to Get Started

I’ve found this to be an easy “bridge” to help beginning traders get started in the currency market.

Right now is truly the best time to try this out for yourself.

With Japan’s disasters earlier this year, they have never had more incentive to help their economy recover. As they are pushing for a recovery, Japanese stocks should rise once again.

Also, central bankers are still on the warpath about the incredibly strong Japanese yen. Back in March, several central banks in the G-7 (including the Fed) coordinated a massive intervention to push down the yen’s value.

So far, it has not succeeded, but they are likely to keep at it. Eventually, I see these central bankers dragging the yen’s price lower.

All of these dynamics make NOW a great time to check out this simple strategy.

There are so many “yen pairs” out there to choose from that you’ll have plenty to trade just off of this one tip alone.

Bottom line: With the Nikkei breaking higher, it looks like its open season to short the Japanese yen pairs. But going forward, just watching Japanese stocks can easily tell you where the yen is headed next.

Have a Nice Day!

Sean Hyman
Editor, Currency Cross Trader

Quake Response Puts Yen on the Line

By: Peter Schiff, CEO of Euro Pacific Capital

One of the immediate financial consequences of the catastrophic Japanese earthquake is that Japan needs to call on its huge cache of foreign exchange reserves to rebuild its shattered infrastructure. To pay for domestic projects, Japan will require yen – not dollars, euros or Swiss francs. As a result of these conversions, the yen rallied considerably after the quake struck.

But a surging yen runs counter to the macro-economic currency plans favored by most global economists. In order to maintain Japan’s position as a net-exporter of manufactured goods and net-buyer of US debt, the yen needs to stay down. So, the G-7 group of the world’s leading economies has intervened in the foreign exchange market by selling yen holdings, thereby pushing the currency down. In the short-term, their efforts appear to have been “successful,” with the yen dropping sharply today.

Theoretically, this action is being taken to preserve export earnings, but this is only a secondary effect. Primarily, in making this move, the G7 is saying that the key to rebuilding Japan’s earthquake-ravaged economy is to raise the price of everything it needs to buy.

After all, absolute purchasing power is far more important than nominal export earnings. When the yen gains in strength, Japan earns more dollars from its exports, which could now be used to purchase the raw materials necessary to rebuild its infrastructure. However, by weakening the yen, Japan earns fewer dollars for its exports, increasing the economic burden of reconstruction.

Conventional wisdom is that a weakening currency is a boon for economic growth and exports; however, history does not support this view.

For example, during the 20-year period from 1971 to 1991 – often referred to now as an economic miracle – the Japanese yen tripled in value against the dollar, an average appreciation rate of about 10% per year. This increasing purchasing power enabled the Japanese to enjoy steady economic growth and rising living standards. Over that time, Japan’s GDP grew at an average rate of 4.5% and net exports increased fivefold. Government debt as a percentage of GDP fell slightly to about 20%.

Over the following 20 years, from 1991 – 2011, the Japanese economy has been dead in the water. Yen appreciation slowed considerably, with the currency rising by approximately 50% against the dollar, or about 2.5% per year. However, over that time, the Japanese economy and net export growth essentially stagnated, with GDP growing by less than 1% per annum and government debt exploding to over 120% of GDP.

The real problem for Japan is that in the aftermath of the bursting of the stock and real estate bubbles, the Japanese government refused to allow market forces to repair the damage. Instead, it based its foolish approach on restricting the rise in its currency to maintain exports to the United States.  In this cart-before-the-horse worldview, Japan assumed its economic growth was a function of its exports. In reality, exports flow from economic growth.

So, in order to engineer an export-led recovery, Japan embarked on an era of central government planning, Keynesian style pump-priming, and nearly endless quantitative easing. The result was disaster. The only bright spot was that the underlying strength of the Japanese economy kept a lid on consumer prices despite all the inflation deliberately created by the Bank of Japan. So even while good jobs have become harder to find, ordinary consumers have had the benefit of falling prices. It is ironic that Japan’s “deflation” is cited as the primary cause of its malaise. If Japan’s economy had been less efficient, its 20-year malaise would have been accompanied by increasing consumer prices, a.k.a. stagflation. This would have caused much more suffering to the Japanese people.

Still, as a result of its enormous economic policy errors, much of Japan’s efforts over the past 20 years have benefitted Americans rather than its own citizens. A tremendous share of their purchasing power was transferred across the Pacific, helping to inflate a bubble economy in the United States. Of course, as the Japanese economy struggled beneath the weight of this massive American subsidy, it gradually passed the baton to China, which for the same foolish reasons was happy to run with it.

The unfortunate reality is that the Japanese government is doing more economic damage to Japan than the earthquake and tsunami did. This new round of inflation will overwhelm the ability of the Japanese economy to offset upward pressure on consumer prices. Combine that with the lost output associated with the quake and the expense of reconstruction, and it becomes evident that inflation will soon become a major threat to Japan. As this realization forces interest rates higher, the cost to Japan of servicing its massive government debt will be crushing.

There is still time for Japan to rethink its self-destructive monetary policy, let its currency rise, and allow its economy to recover. If they do, the US will experience its own disaster as the dollar tanks.

Peter Schiff
is CEO of Euro Pacific Capital and host of The Peter Schiff Show

Japanese Yen – Your Next 400% Winner?

japanese yen

By Evaldo Albuquerque, editor, Exotic FX Alert

“I certainly thought that inflation was a dragon that was eating at our innards, or more than our innards, and if anybody was going to deal with this it was going to have to be the Federal Reserve. I saw the need to slay that dragon.”

…That’s how Paul Volker describes his tenure as the Fed Chief in the 1980’s. His job was to “slay the inflation dragon.”

That may sound strange – especially if you read how most Fed Chiefs have welcomed inflation and devalued the dollar over the last century in yesterday’s Sovereign Investor.

But Paul Volker is probably the only exception to that sad legacy.

Volker became a legend on Wall Street in the early 1980s when he hiked interest rates to curb strong U.S. inflation.

Until very recently, Volker was the head of Obama’s outside panel of economic advisers. But he just quit!

The guy who “slew the inflation dragon” was probably feeling like a complete misfit in an administration that’s clueless about inflation risks. I’m sure he didn’t want to be associated with a government that’s unleashing the dragon once again.

As Obama-style inflation rips through the markets, many investors will duck for the cover of hard assets. However, there is a better way.

You can earn as much as 400% from inflation risks with a single surprising play in the Forex market. I’ll introduce that play in just a second. First let’s take a look at how this coming inflation will shock the currency markets.

Fed Rumblings Will Send Bond Rates Higher in 2011

So far, pretty much all the Fed members agree interest rates must remain at just above 0%. This means most Fed-Heads aren’t ready to battle inflation at the expense of the economy. That’s why most investors are not focusing on inflation risks either.

However, that is about to change this year.

With economic momentum building, certain Federal Reserve bankers are now calling for higher rates. After all, unlike Bernanke, some Fed members actually care about rising inflation risks.

Once the discussions among Fed members start to pick up, investors will start speculating that the Fed will raise rates to fight inflation. Yields on U.S. bonds will have to rise to compensate investors for inflation risks.

Even though I don’t expect the Fed to hike rates this year, yields will start moving higher way before then.

That’s important because higher yields will cause incredible shocks in the Forex market. It will affect one currency in particular: the Japanese yen.

Japanese Yen: Ground Zero for the
Next Currency Shock

With its 0% interest rate, the Japanese yen has been the traditional funding currency for carry trades. In other words, traders have traditionally borrowed Japanese yen to invest in currencies that offer higher yields.

But when U.S. interest rates collapsed in recent years, the Japanese yen finally had some competition from the U.S. dollar. Traders started to use the dollar as a funding currency.

Once U.S. interest rates rise, the dollar will see a short-term spike in value against currencies with lower interest rates, such as the Japanese yen. That’s because as interest-rate differentials between these two currencies will widen. When that happens, money will naturally flow out of the low-yielding yen and into the higher-yielding dollar.

With Japan trapped in an eternal deflation, rates won’t go up anytime soon. So the yen will once again become the favorite funding currency for carry trades. That’s when we will see the pair USD/JPY moving higher (the dollar will strengthen against the yen).

Check out the chart below. It’s very clear there’s a strong inverse correlation between the yen and U.S. yields. When U.S. yields rise, the dollar gains in value against the Japanese yen. It happened in 2004, and it looks like it will happen again this year.

Higher Yields in the U.S. Will Force the
Dollar to Rise Against the Japanese Yen

The U.S. dollar is massively undervalued compared to the Japanese yen right now.

A small move in the 2-year Treasury yield, such as the one we’ve seen in the beginning of 2010, would be enough to push the USD/JPY pair up by at least 8%. In the currency world, 8% is a HUGE move.

Using leverage that’s available in the Forex market, you can turn that 8% move into profits of 400% in the next few months. All you have to do is buy the USD/JPY (or essentially buy the dollar, short the Japanese yen). Just keep in mind there will be a few pullbacks along the way, so make sure you have stop-losses in place.

As you can see, the Fed’s current monetary policy will shock the foreign exchange market this year. Shorting the yen will be a nice way to profit off these coming inflation shocks.

Best Regards,

Evaldo Albuquerque
Editor, Exotic FX Alert
Blog: http://evaldo.worldcurrencywatch.com

Can Switzerland and Japan Solve Their Currency Problem?

Bryan Rich

Currencies play an important role in the economic health of a country — impacting the flow of trade and capital.

For instance, a weak currency can be quite good for an economy in times of recession. It stimulates demand for a country’s exports, which can drive growth in manufacturing, boost employment and give overall economic performance a nice jolt. And for foreign investors, a cheap currency makes a country’s investments more attractive.

On the other hand, a strong currency can be a benefit too. It can give consumers access to cheaper production and higher growth assets in foreign markets, which can improve their standard of living.

Moreover, a country’s currency plays a huge role in the perception of its global economic stability and safety. Indeed important.

But there becomes a problem when a currency is too weak or too strong …

A currency that’s too weak, or one that could weaken materially in the future, can drag down an economy. It can scare foreign investors away and can cause existing foreign investments to flee.

Conversely, a currency that’s too strong can depress a country’s exports and ultimately cause deflation.

And That’s Precisely What We’re
Seeing in Switzerland and Japan

Because Switzerland and Japan maintained relatively low interest rates when the global economy was booming — before the financial crisis started — the Swiss franc and the yen were popular funding currencies for the massive carry trade.

The Swiss franc has surged against the euro and pound.
The Swiss franc has surged against the euro and pound.

The unwinding of this trade, along with the fall in competitive global interest rates over recent years, has kept these currencies persistently strong, even in the face of deep recessions.

Historically, countries dealing with recession tend to rely heavily on exports as a tool to return to sustainable growth — a needed bridge in order to rebuild domestic demand.

But with currencies that have strengthened more than 30 percent relative to their major trading competitors, Switzerland and Japan have been at a distinct disadvantage.

Consider this …

Since the middle of 2007, when the subprime problem began to rear its head, the Swiss franc has appreciated 23 percent against the euro and nearly 40 percent against the British pound. That’s made exporting to these two important markets considerably less competitive.

This is why Switzerland has intervened numerous times in an attempt to stem the tide of currency appreciation against the falling euro and pound. But it hasn’t worked. The sovereign debt risk in the euro zone and UK has been too overwhelmingly negative on their currencies.

The strong yen has put Japan's exporters at a clear disadvantage in Asia.
The strong yen has put Japan’s exporters at a clear disadvantage in Asia.

As for Japan: Japan is a heavily export-dependent economy. And its main trade competitor in Asia is China. Given that China has kept its currency very closely aligned with the value of the U.S. dollar through the economic crisis, the yen has soared in value relative to the yuan — to the tune of 24 percent.

This exchange rate disadvantage is a key reason why Japanese officials have been “on watch” for intervention to weaken the yen.

But What Is a Fair Value for
the Franc and the Yen?

For our guide, let’s take a look at the market’s estimate of the current “fair value” of currencies.

We’ll use an economic theory known as purchasing price parity (PPP), which adjusts the exchange rate so that an identical product in two different countries has the same price when expressed in the same currency.

In the chart below, you can see some of the most overvalued currencies according to the Organization for Economic Co-Operation and Development’s (OECD). The axis on the left shows how overvalued these currencies are based on PPP.

According to this measure, the Swiss franc is the most overvalued currency in the world, relative to the U.S. dollar. Also sitting well in overvalued territory is the Japanese yen.

Given the likelihood of another round of crisis in the euro zone, the Swiss aren’t likely to see the tide of the Swiss franc change against the euro. But, if risks continue to elevate, the Swiss franc should weaken against the dollar, as it did during the first half of 2010 — giving the Swiss some relief.

As for the yen, it appears that nothing short of actual intervention will change the tide of the yen, to release the pressure valve on its exporters. And I expect that will happen, which represents an opportunity for currency investors.