Trading Idea: Buy March 105 Yen Puts
The Japanese yen has been rising against most major currencies, and at these lofty levels, I think the government could come in and weaken the yen. Export growth is essential to Japan’s economy, and a weaker yen has a significant negative impact. In 2008, the yen rose more than 20 percent against the U.S. dollar and euro, more than 50 percent against the Australian and New Zealand dollars, and more than 70 percent against the British pound. The yen has hit a 13-year high versus the dollar and there has been speculation it has to come down one way or another.
“We are somewhat…no, we are greatly….surprised that the authorities in Japan have not moved to intervene against the yen, for the damage being wrought upon Japan’s exporters is very, very real indeed,” Dennis Gartman recently wrote in his Gartman Letter.
Export-driven companies have been impacted by this situation. Sony recently warned of its first operating loss in 14 years, and Toshiba warned of its first in seven years.
Fujio Mitarai, chairman of the nation’s most powerful business lobby, Nippon Keidanren, urged Japan’s Ministry of Finance to step in. “If this situation continues for a long time, I want [the government] to intervene,” Mitarai, who is also chairman of Canon, said on January 12, 2009. “The current rise in the yen across the board is not good for the Japanese economy,” he said.
The last time the Ministry of Finance intervened in the foreign exchange markets to prop the currency was in 2004. At that time, the yen traded at around 104 to the dollar, which was weaker than the current rate just below 90.
While the government may have reasons for reluctance to directly intervene, market participants have certainly been bidding up the yen and I think a correction is likely. So far Japan’s policymakers have tried other measures to bring the yen down, to little avail. The Bank of Japan meets on January 21, and no interest rate policy changes are anticipated from an already rock-bottom low of 0.1 percent in its key rate.
At this time, I recommend buying the March yen 105 put at a cost of about $700, which represents your defined risk, excluding commissions. I feel yen futures will fall to 1.02-1.01 within the next 50 days, from near 1.12 currently. Technical momentum indicators are showing a significant overbought condition that in my opinion, won’t last a lot longer.
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