April 1, 2010 – The Yen is Setting Up for a Short, But Higher Up

Featured Trades: (YEN), (YCS), (EURO/YEN)

1) The Yen is Setting Up for a Short, But Higher Up. ‘Oh, how I despise the yen, let me count the ways.’ I’m sure Shakespeare would have come up with a line of iambic pentameter similar to this if he were a foreign exchange trader. Those who followed me into a yen short at ¥88.5 on March 5 and held on until yesterday’s low of ¥93.25 are looking at a profit of 5.1% and a home run of 25.5% if you went with my recommended 500% leverage with a stop. If you bought the leveraged short yen ETF (YCS), you clocked 10.4% on the move from $19.25 to $21.25. It beats the hell running with the lemmings in the S&P 500, doesn’t it? We are now within reach of my initial target of ¥95, which we could see as early as Friday. Those with hot hands who have been unable to sleep since they strapped this baby on might want to cash in there. Others who are in for the long haul can sit back, get comfortable, and dig into the first chapter of Lady Muromachi’s 1,000 page Tales of the Genji. To remind you why you hate the Japanese currency, I’ll refresh your memory with this short list:

* With the world’s weakest major economy, Japan is certain to be the last country to raise interest rates.
* This is inciting big hedge funds to borrow yen and sell it to finance longs in every other corner of the financial markets. Notice that the euro/yen cross has popped from ¥121 to ¥125 in the last three weeks.
* Japan has the world’s worst demographic outlook that assures its problems will only get worse. They’re not making Japanese any more.
* The sovereign debt crisis in Europe is prompting investors to scan the horizon for the next troubled country. With net net debt at 100% of GDP, Japan is at the top of the list.
* The Japanese long bond market, with a yield of 1.2%, is a disaster waiting to happen.
* You have two willing coconspirators in this trade, the Ministry of Finance and the Bank of Japan, who will move Mount Fuji if they must to get the yen down and bail out the country’s beleaguered exporters.

This is all why, after catching a breather at ¥95, we’re going to ¥100, then ¥120, then ¥150. That works out to a price of $37 for the YCS, but it might take a few years to get there. If you think this is extreme, let me remind you that when I first went to Japan in the early seventies, the yen was trading at ¥305, and had just been revalued from ¥360. If we get a surprise with Friday’s nonfarm payroll figures, and you get a pop up in the yen, use the gift to increase your shorts in the futures and the (YCS). And no, this prediction is not an April fool’s prank.

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