The CurrencyShares Japanese Yen Trust (NYSEArca: FXY) was one of the best-performing developed market currency exchange traded funds for much of this year, but as a result of the dollar’s recent resurgence, yen strength is a rapidly evaporating theme.
FXY traded around $96 for part of October, but the yen ETF closed below $86 on Wednesday, bringing its November slide to about 7.5%. Not surprisingly, yen weakness is boosting Japanese equities and the relevant ETFs trading in the U.S. 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.
Meanwhile, the Japanese economy grew at a faster-than-expected 2.2% pace in the third quarter, its third straight quarter of expansion. The growth was driven by exports, which increased 2% compared to the prior quarter. With the Japanese yen now depreciating against the U.S. dollar, export growth may continue to expand.
The iShares MSCI Japan ETF (NYSEArca: EWJ) is the largest Japan ETF trading in the U.S., but EWJ is not a currency hedged fund. Currency hedged Japan ETFs include the iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) and the Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP). The currency-hedged ETFs are outperforming non-hedged funds as the local currency depreciates against the U.S. dollar.
“Credit Suisse upgraded Japanese equities to overweight and increased its mid-2017 target for the Nikkei to 20,000,” reports Reuters. “The outlook was based on the expectation of a weaker yen adding to Japanese company earnings. The Bank of Japan is expected to increase monetary stimulus to keep JGB yields at zero (as investors move towards USTs), thus driving the yen lower.”