Trading in yen risks losing a slice of profits

THE Japanese yen has taken a smashing lately, falling by 3.5 per cent against the dollar since mid-September. Recent data shows Japan’s exports are down 10.3 per cent annually. While trade with China, its largest trading partner, is down 14.1 per cent on the back of political tensions over the Senkaku islands; trade to Western Europe is down 26 per cent, on the back of the Eurozone crisis.

The export-focused economy is weak and a recession looks likely. Unsurprisingly, there are calls for monetary easing to devalue the yen and make exports more competitive, something corporates have been crying for. There is speculation that the Bank of Japan (BoJ) could announce further easing when it meets on 30 October.

The BoJ has been expanding its balance sheet since before the onset of the financial crisis. But it has only been successful when easing has been aggressive, like in February this year, when they fired-up asset-purchases, pushing yen down from ¥76 per dollar to ¥84 in six weeks. Since then, the yen has been range-trading between ¥78 and ¥80.

Two factors may limit the success of future easing. First, the Fed has started its own easing programme. Given its unlimited nature, Kathleen Brooks of thinks it would “take something huge” from the BoJ to counter its effects – possibly matching the Fed’s open-ended commitments. Second, given that the tensions with China are political, it is debatable whether monetary policy could help.

The Japanese economy has been stagnant for almost two decades and there are plenty of reasons to be bearish. Debt to GDP is well over 200 per cent; Standard and Poor’s recently said that it might downgrade Japan if the situation continues.

Angus Campbell of Capital Spreads says that “on the whole, there is a lot of negative sentiment against the yen,” pointing out that dollar-yen has breached its 200-day moving average. The moving average convergence divergence oscillator is also in overbought territory. He warns “we may see further pullback if there is risk-aversion in equity markets.” Previous resistance is around ¥79.60 and Campbell thinks that this level could attract buyers.

But Simon Smith of FxPro has a stern warning for those looking to bet against yen: “The street is piled high with the bodies of yen bears through the decades – with the yen, there is a decent probability that you could end up on that pile.” Brooks says a safe strategy might be to “wait for the Fed, and buy yen on dips; the outlook for the US looks better than it does for Japan, and QE3 may not be long-lived.”

There is a trading metaphor about trying to catch falling knives. But playing the yen may be more like juggling samurai swords.