Favored Currency Trade Anyone Can Take

05/23/2012 1:30 pm EST


Michael Paulenoff

Consultant and Publisher, MPTrader.com

Trading US dollar strength against a weakening Japanese yen looks highly promising this year, says Michael Paulenoff, and a particular currency ETF can allow anyone to play this trend.

The best instruments to use in these market conditions. Today I’m with Michael Paulenoff, and he’s going to tell us how best to take advantage of what we have with specific instruments.

First of all, let’s look at one of the great bull markets that I think is emerging in the financial markets—a bull market in the dollar versus the yen, or a bear market in the yen by itself.

To take advantage of that, the instrument I would use is the ProShares UltraShort Yen (YCS), a double-short ETF. You’re short the yen, and the leverage is twice the usual amount. It is based on USD/JPY, the spot currency.

In addition, if that bear market in yen does unfold the way I think it should, and with the force and the sustainability I think it should, the other instrument that we could use would be the iShares MSCI Japan Index Fund (EWJ).

You would play the Japanese market to appreciate. Why would you do that? Because it’s very export-oriented. It’s heavily weighted in exports, which makes sense.

But it’s also heavily weighted in the auto stocks and the electronic corporations that export a lot of merchandise from Japan. So if the yen is going down, they’re getting the benefit of that exchange rate, and those instruments should, in theory, appreciate.

Now of course, it’s an equity instrument, EWJ. So if global equities are having a correction, we have to see if the relative strength created by the declining yen outweighs the negativity of a global equity contraction.

See also: Global ETFs Warned of US Weakness

My sense is that if you’re diversified and you want to diversify internationally, EWJ would outperform or perform relatively well in an environment where you get a contraction in the overall equity markets.

Now why would I bring that up? Because we’ve been going straight up since October 4, 2011, so there’s a correction that will take place. The question is, is that correction going to be a news-driven, event-driven correction that is forced on the market, or will it be driven by exhaustion?

One or the other is coming. So if by the end of the first quarter we have not seen an event-driven pullback in the markets—like oil prices skyrocketing on an international event, which would ultimately hurt equities—then I think equities will be exhausted, in any event.

At the end of the first quarter, probably we’ll be either involved in a correction, heading for a correction, or totally exhausted, so you want to be really careful.

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