As markets anticipate a higher chance of a Federal Reserve rate hike, the yen currency has weakened against the U.S. dollar and bolstered export-heavy Japanese markets and country-specific exchange traded funds.
Over the past month, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) gained 2.9%, iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) rose 2.0% and Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) advanced 2.1%. The currency-hedged ETFs are outperforming non-hedged funds as the local currency depreciates against the U.S. dollar.
For instance, the non-hedged iShares MSCI Japan ETF (NYSEArca: EWJ) was only up 1.1% over the past month while the CurrencyShares Japanese Yen Trust (NYSEArca: FXY) fell 0.9%. Meanwhile, the JPY is now trading at ¥104.1 against the dollar
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Market observers argue that the greenback will maintain its momentum as more traders anticipate the Federal Reserve to hike interest rates 25 basis points in December, especially after minutes from the Fed’s September policy meeting released on Wednesday revealed many members leaning toward higher borrowing costs on improving U.S. economic conditions.
“The domestic numbers are going to be important for the Fed, that’s what they care about, and they continue to line up nicely for a Fed rate hike,” Matt Maley, an equity strategist at Miller Tabak & Co. LLC, told Bloomberg.
Roy Teo, senior foreign exchange strategist at ABN Amro, thinks the yen will continue to weaken and set an upside target of ¥107, Financial Times reports.
Looking at Japanese markets, Teo argued that the Bank of Japan will “cut the policy rate from -0.1 per cent to -0.2 per cent next year,” putting more pressure on the yen.
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“An unwinding of overcrowded speculative long yen positions could push the yen weaker towards [the]next resistance zone around ¥107.50-107.90 in the coming weeks,” Teo added.
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WisdomTree Japan Hedged Equity Fund