What I Told My Brother About The Yen

| March 15, 2010 | 0 Comments

A few weeks ago, the phone rang… It was after 10:00 at night and I didn’t recognize the number.  I flipped it open and said, “Hello?”

The phone crackled from half way around the world.  It was my brother.

My youngest brother had just moved from his home in Hawaii (I knew I should have visited him more frequently)… to his latest stop – Japan.

He and his wife agreed to a three year assignment.

They’re now living in Japan and he’s doing some engineering work for the Navy.  As an engineer, he’s always been very analytical.  So I wasn’t surprised at his next question…

“I’m trying to figure out when to convert my paycheck into Yen.”

Should I do it all now, or wait?

The problem he faces is one that investors from all over the world face. How are the values of various currencies changing… and what do I do about it?

In this instance, waiting for the currency to change in value can have dramatic effects on your spending money.

In Late November, the currency traded up to $116… just a month or so later, the Yen was trading below $107.  That’s a change of 7.7% in about six weeks.

If your paycheck is issued in US Dollars and you need Yen to spend, the change in prices represents a huge impact on your spending… can you imagine having almost 8% of your income just disappear?

Or worse yet, not knowing if your next paycheck will cover your expenses?

Being in that situation can be quite scary.

So my advice was simple… when it comes to managing your money, think in two different time frames.  Short term and long term.

For short term purposes, he should convert enough money to live comfortably for a few months.  That means having enough to cover your expenses and most of life’s little extras.

This takes the pressure off worrying about when and how much to convert should the exchange rate get out of whack.

Then the other thing he should do is focus on the long term trends.  The currency market tends to move in trends of months and sometimes years.  Watch the interest rates, and more importantly, the exchange rates.  Don’t rush out to convert every penny.  When exchange rates start moving in your favor, take advantage of the situation and then convert a bigger chunk all at once.

By converting currency this way, he’ll also avoid the sometimes aggressive fees banks and other currency exchange organizations.

So that’s great.  But what does it mean for currency traders?

Before I tell you what I think about the Japanese Yen, here’s an important note…

All currencies are traded in pairs.  When I look at the Japanese Yen, I’m always looking at the JPY/USD pair.  Why is this important?  Most mainstream news sources look at it in the opposite direction – they look at the USD/JPY.  So if the Yen is falling (at least what they announce on TV), that means the Yen is actually climbing in the securities I trade.

Once you wrap your mind around the inversion, it’s easier to understand… but for new traders it can be a bit difficult.

So back to the Yen.

Recently announced GDP numbers were below analyst expectations.  And machine orders were also down.  Add to that the fact that industrial production was flat, and you start to develop a dim view of the Japanese economy.

The recent run-up in the Yen (from the January lows) was caused by fear.  The Greece government debt crisis and the potential downfall of Europe pushed investors into safer investments… and the Yen was one of those.

The crisis is far from over, but the fear of it is subsiding… and investors are once again seeking out higher yield investments.  This is causing the Yen to fall.

Now another trading strategy is coming back to life… the carry trade is starting to resume.  Simply put, the carry trade is borrowing in one low cost currency and investing in a high yield currency.  The Yen is once again the lowest cost currency out there… and that means it will face downward pressure from this trade being reapplied.

Longer term, I see nothing but lower prices for the Yen.

Now I didn’t just develop this view.  A few weeks ago, subscribers to Currency Options Insider received an options trade to profit from this trend.  We’re up 54% already!

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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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