As the Federal Reserve takes a more hawkish stance, Japanese retail investors have turned to U.S. dollar assets, potentially weighing on the yen currency exchange traded fund and helping to support the greenback.
New U.S. dollar-denominated funds sold to Japanese retail investors have attracted 39% of almost ¥1 trillion, or $9.7 billion, of inflows from May 2013 to June this year, reports Ben McLannahan for Financial Times.
Across all mutual fund types, U.S. dollar-denominated assets have accumulated ¥12 trillion, close to the October 2007 peak of ¥12.3 trillion. As Japanese investors sell-off yen investments to acquire U.S. dollar-denominated assets, the Japanese yen could depreciate.
So far this year, the CurrencyShares Japanese Yen Trust (NYSEArca: FXY) has gained 3.7%. However, many traders expect the yen to continue depreciating, with the Bank of Japan adhering to its loose monetary police and the Fed tapering its bond purchases and eventually hiking rates.
“The onset of tapering has made everyone think of dollar strengthening,” Shin Kadota, a foreign-exchange strategist at Barclays, said in the article.
The PowerShares DB US Dollar Index Bullish Fund (NYSEArca: UUP), which tracks a basket of the six major world currencies – the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, has dipped 0.2% year-to-date.
Tohru Sasaki, head of foreign-exchange research at JPMorgan, believes that many investors are counting on a “Kuroda put” at ¥100 against the USD in the event the BOJ implements anther round of easing if the yen strengthens beyond that point.
The yen is currently trading around 101.38 per U.S. dollar, strengthening from around 105.3 since the start of the year.
Shusuke Yamada, chief foreign-exchange strategist at Bank of America Merrill Lynch, also points out that yen gains will be capped over the longer-term due to the country’s large trade deficit, strong outward foreign direct investment and domestic institutional investors purchasing foreign assets.
“The fundamentals point still to a weaker yen; that hasn’t changed,” Yamada said in the article.
More aggressive currency traders can capitalize on yen weakness through the ProShares UltraShort Yen (NYSEArca: YCS), which tries to reflect the daily -2x or -200% daily return of the U.S. dollar price of the yen. YCS is down 8.5% year-to-date. [A Short Yen ETF to Hedge Against Further BOJ Action]
CurrencyShares Japanese Yen Trust
For more information on the yen currency, visit our Japanese yen category.