In late 2012 Japan launched a huge QE program which was the catalyst for a weakening move in the yen. $/yen went from 75 all the way to nearly 126 by June of 2015. However, since then, even after the Bank of Japan recently (end of January) instituted negative rates, the yen has actually strengthened, and was trading late Tuesday at 112.56.
One of the lessons I learned early on is this: If the news for the market is bearish, but the market reacts bullishly, then it’s a bull market. It’s not always the case, but it’s a huge red flag when a market does not trade with bias of new information.
Additionally, the Japanese ten year note went from around 25 bps at the beginning of the year to -10.8 bps Tuesday, with much of decline coming after the Bank of Japan’s surprise cut to a tiered negative rate system. In comparison, Tuesday’s closing yield of 1.832% in the US ten year note would make one think that the dollar would maintain a strong bid vs the yen.
The yen has a tendency to trade as a ‘safe haven’. That is, when international equity markets are turbulent and sliding, the yen tends to strengthen. It is perhaps a bit simplistic to base a trade on tendencies, but I think its well worth buying a call spread on the yen future. The end of the Japanese fiscal year is the end of March, which is another reason the yen may strengthen going into the end of the month.
The yen future trades as the inverse of the $/yen. JYM6 closed Tuesday at 89.065. Because the yen has been in an uptrend already, this might not be the ideal location to initiate a trade. However, the options market affords a limited risk entry even if location isn’t perfect. I would look at buying April JY 91.00/93.00 call spread for 0.30. Expires in 30 days on April 8. Risk 0.30 to make 1.70. In the cash market, the 0.382 retrace from the late 2012 low to the high of 125.86 in June of 2015 is 107.25. Converting to futures, that target level would be 93.24.
Alex Manzara
