Up 12.6% year-to-date, the CurrencyShares Japanese Yen Trust (NYSEArca: FXY) is one of this year’s best-performing developed market currency exchange traded funds. That has not been good news for equity-based Japan ETFs, but there is some goods and that is the yen could be ready to decline.
The yen’s strength has prompted questions regarding just how long the currency will keep soaring and if it is vulnerable to a near-term pullback. Thanks to intensifying speculation that the Federal Reserve is heading toward its first interest rate hike of 2016 next month, the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), which tracks the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, is on the move higher.
Related: Are Dollar ETFs Ready to Rally?
“In the big picture, we believe the Yen is forming a very large corrective wave pattern – one that began in 2011 and could continue into 2018 or beyond. The first leg of that Japanese Yen wave pattern was the steep decline from 2011 into the low of 2015,” according to See It Market.
“The yen is set to snap three straight months of gains. The BOJ announces its next policy decision on June 16 after refraining from additional easing at the last meeting in late April, opting to take more time to assess the impact of negative interest rates,” according to Bloomberg.[related_stories]
A rising dollar also makes already hot U.S. government debt more attractive to investors, particularly those outside the U.S.
Persistent yen strength could continue to weigh on Japanese equities. For instance, electronic parts maker Murata Manufacturing Co. lost 13% following its projects for a dip in earnings in the fiscal year, citing a stronger currency, lower product selling prices, increased fixed costs and higher R&D expenses.
More money managers are growing pessimistic over Japan’s outlook. For instance, BlackRock is among firms ending their bullish call on Japan – the money manager also downgraded its outlook on Japan from overweight to neutral, citing the stronger yen’s risk to export industry’s earnings and increased volatility.
Investing in the forex market helps investors diversify and hedge with currencies, which may reduce portfolio risk while maintaining an upside potential. For instance, individuals holding assets denominated in a foreign currency are exposed to currency risks – if the foreign currency weakens compared to the U.S. dollar, the investor’s foreign investments will also depreciate in value once converted back to U.S. dollars.
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CurrencyShares Japanese Yen Trust
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.