Huge Gains From The Japanese Yen

| April 6, 2010 | 0 Comments

A little over a month ago, I told you about my brother.  He’d just moved to Japan for a three year assignment with the Navy.  While living overseas can be exciting, it brings its own stress too.

One of the problems he faced was converting his US Dollars into Yen.

When was the right time to do it?  How could he maximize his spending power?  What would move the Yen in the near future?

I gave him a two-pronged strategy to deal with these issues.  First was making sure he had enough US Dollars converted into Yen to cover his every day needs.  Then I told him to opportunistically exchange Dollars for Yen as the exchange rates fluctuated.

I even said: “I see nothing but lower prices for the Yen.”

I couldn’t have been more right… but more on that in a moment.  Let’s take a look at the Japanese economy.

Before the “Great Recession”

Japan has been struggling.  For years, the economy has been withering on the vine.  Economic growth was non-existent.  Because of this, the Bank of Japan was forced to keep interest rates low, and often under 1%.

They were hoping the cheap lending rates would drive economic growth.

All it did was attract international hedge funds who started establishing a carry trade with the Yen.  Essentially, they’d borrow money in Yen (at really low interest rates) and reinvest in other countries (where interest rates were higher).

The hedge funds would capture the spread.  They’d keep the difference between the two interest rates.

It doesn’t seem like much when you’re borrowing at 1% and investing at 4%.  But a 3% spread when applied to billions and billions of dollars made some people very wealthy.

Of course, to put on this trade, investors had to sell the Yen.

This kept the currency trading at low valuations.

Then the “Great Recession” turned everything on its head… in 2008 and 2009, investors were no longer looking for yield.  Nope.  What they wanted more than anything was safety.  And aside from the US, Japan’s economy (the second largest in the world) looked particularly safe.

Money flooded out of emerging market currencies (countries like India, Russia, and Brazil) and flowed into Japan.  This drove the value of the Yen higher.

But the economic situation in Japan didn’t justify the increasing value.

The Japanese economy was, and still is, in the dumps.  GDP numbers are horrible and the economic numbers from industry are sickening.  At one point, Japan was seeing industrial production numbers down more than 20%.

Now, investors who flocked to the Yen are realizing it’s not the place to be.

As they pull their money out of Japan, they will once again sell the Yen… pushing it lower.  And we see that already starting.  The Yen peaked at $116 in December of last year, falling to $107 in early January, before climbing again to $113 in early March.

I told my brother the Yen would be heading lower.

And, I told subscribers to my Currency Options Insider service to buy puts on the Yen on March 1st.  The trade I recommended hit a peak gain of over 215% yesterday… not a bad trade for a single month.

I still think the Yen could fall further.  The Japanese economy is looking weak and the carry trade is kicking back in.  It all adds up to lower values on the Yen.

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Category: Currency Trading

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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