The short-Japanese-yen trade, along with the inverse currency-related exchange traded fund, is gaining momentum as Bank of Japan and Federal Reserve policies diverge and the JPY/USD carry-trade returns.
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, rose 0.4% Friday and has jumped 9.9% over the past three months.
Meanwhile, the CurrencyShares Japanese Yen Trust (NYSEArca: FXY) has declined 4.9% over the past three months while the ProShares Ultra Yen (NYSEArca: YCL), which tries to reflect the daily 2x or 200% daily return of the the U.S. dollar price of the yen, fell 8.3%. [Currency ETFs To Keep An Eye On]
The U.S. economy is mending, which has fueled speculation that the Fed will hike rates sooner rather than later, whereas the Japanese economy has slowed down due to an increase in sales tax, fueling speculation that the BOJ could ease further, CNBC reports.
Consequently, the diverging policy outlook has helped the U.S. dollar appreciate and weighed on the Japanese yen.
“I think this breakdown in the yen has pretty high momentum. I wouldn’t be surprised to see the yen get substantially weaker,” Jeffrey Gundlach, founder of DoubleLine Capital, said in the article.
Alan Ruskin, global head of Group of 10 foreign exchange strategy at Deutsche Bank, believes the dollar could finish the year at $112 against the yen and rise to $120 at the end of 2014. The yen currently trades around $107.3.
“If U.S. rates fully normalize over a three-year period (fed funds near 4 percent by early 2018) and Bank of Japan rates still are at zero, you could perhaps see dollar-yen at 140,” Ruskin added.
Moreover, Investors could magnify the sell-off in yen and demand in the U.S. dollar as more people capitalize on the carry-trade – investors purchase higher-yielding currencies with higher interest rates, like the dollar, by selling lower-yielding currencies, like the yen. Kathy Lien, longtime forex strategist who started BK Asset Management, argues that the environment is “the perfect backdrop for carry trades to return.”
ProShares UltraShort Yen
For more information on the yen currency, visit our Japanese yen category.
Max Chen contributed to this article.