Slumping EM Currencies Pressuring Japan ETFs

August 27th at 10:00am by Tom Lydon

Tumbling emerging markets currencies from India to Indonesia to Brazil to Turkey are having an adverse impact on eager yen bears that had been hoping for more weakness out of the Japanese currency.

In the past month, the the WisdomTree Emerging Markets Currency Fund (NYSEArca: CEW) has lost nearly 3% while the CurrencyShares Japanese Yen Trust (NYSEArca: FXY)is just fractionally lower. The yen could be in for further upside, pressuring equity-based Japan ETFs in the process, as currency traders seek out safe-haven alternatives to the U.S. dollar. [Emerging Market Currency ETF Perks Up]

With turbulence seemingly escalating by the day for currencies such as the Indian rupee, Indonesian rupiah and others, traders are increasingly looking for other currencies to embrace in addition or instead of the U.S. dollar. In addition to the yen, the British pound has also been lifted as emerging currencies have wilted. Sterling has perked up against riskier, commodities-expose currencies to trade higher against many of the emerging Asia-Pacific currencies in recent days. [New ETF Shows Intimate Correlation to British Pound]

As for the yen, the currency is a favored safe-haven destination during times of market stress. That scenario is repeating itself due to at least one obvious reason: Japan is not addicted to external financing to run its deficits. Additionally, Japan has a current account surplus. It is current account deficits that are straining currencies like the rupee and rupiah while sending investors out of Indian and Indonesian stocks. [A Bright Spot for India ETFs]

Earlier this month, Japan reported a smaller-than-expected current account surplus, but the fact remains the country has a surplus at a time when that is a highly prized economic trait.

Although Australia has an AAA credit rating, volatility in the Australian dollar has been rising ahead of next month’s national elections. Lack of clarity on the time line for Federal Reserve tapering could pressure the greenback. Any retrenchment in oil prices would weigh on the Canadian dollar. Those scenarios also highlight the yen’s safe-haven allure.

Japanese equity bulls are left to hope that the yen’s status as a shelter from the storm play is short-lived because in the past month, iShares MSCI Japan ETF (NYSEArca: EWJ) and the WisdomTree Japan Hedge Equity Fund (NYSEArca: DXJ), two of this year’s most prolific asset-gathering ETFs, are each down about 1.7%.

CurrencyShares Japanese Yen Trust

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of DXJ.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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