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Play the Yen Bull Market With This ETF

Sweta Jaiswal, FRM

The Sino-US trade war spat, Brexit woes and slowing global economic growth have for long been adding to the lure of safe-haven investments. One of the classic safe-haven assets that have gained strength in 2019 is the Japanese yen. In fact, per a Bloomberg’s survey of currency analysts, the Japanese yen is predicted to return around 3% to 105 per dollar, outperforming its Group-of-10 peers by 2019-end.

In this regard, Hans Redeker, the global head of currency strategy at Morgan Stanley has commented, “the global environment is in what we describe as an ‘unstable equilibrium’ and we think this is going to cause volatility and a setback in risk assets. All that is going to lead to yen strength.” It is worth noting here that,  Morgan Stanley is forecasting the yen to gain 6% from current levels to the end of 2019 at 101 per dollar (read: Best & Worst Zones of This Year and Their ETFs). 

The ongoing Sino-US trade spat has been keeping investors on edge. There are speculations that with roughly two weeks left for the high-level officials to meet for trade negotiations, the United States is considering plans to limit investments in China. The Chinese state-owned media, Global Times commented on the news saying that the move, “is expected to have significant repercussions for the Chinese and US economies, as well as their companies, in the future.”

Moreover, White House’s adviser on China policy Michael Pillsbury recently commented that President Donald Trump might escalate trade tensions by lifting tariffs if no deal is made. Meanwhile, Trump has stated at the United Nations General Assembly that a “bad deal” in trade negotiations will not be agreed upon. China’s top official has also toughened his tone and said that Beijing will not entertain or permit any threat or interference in its matters. Meanwhile, some analysts don’t see a trade deal happening before 2020 US presidential elections.

A slowdown in global economic growth is being observed with Trump making rampant attacks to defend his America First agenda. This has resulted in weaker currencies, soft economic growth and slashed forecasts for the countries at the receiving end of his trade-related policies. The Eurozone economy has been struggling as the third-quarter end approaches on declining demand for goods and services. The persistent global trade disputes and the prolonged process involving Britain’s exit from the European Union have been primary reasons for this slowdown (read: Eurozone ETFs in Focus on Weak PMI Data).

Moreover, economic impact of the Sino-US trade war resulted in the fastest decline in Japanese manufacturing activity in seven months in September. The Jibun Bank Flash Japan Manufacturing PMI dropped to a seasonally adjusted 48.9 from a final 49.3 in August.

Furthermore, China’s data for August has disappointed investors again. The world’s second-largest economy continues to grapple with slackening domestic demand and tough external conditions. From investment gauges, retail sales to industrial output growth, the weakness was widespread.

Any Hurdles to the Upside?

Yen shows some seasonal trends where it has a tendency to weaken by the end of the year. Moreover, Japanese government bonds valuing around 24.3 trillion yen ($226 billion) are subject to mature during the remaining 2019. Analysts are expecting the Japanese government to reinvest majority of the amount in foreign assets, resulting in selling of the yen.

The Fed has cut interest rates two times this year to sustain a decade-long economic expansion. Major central banks across the globe are also taking steps to shore up slowing economic growth that have eased global recession concerns and in turn lifted investors’ confidence. However, it is being speculated that Bank of Japan might cut interest rates by the end of 2019 followed by another cut by 2020-end. However, the move seems to be priced in at the current level.

Yen ETF to Grab

Invesco CurrencyShares Japanese Yen Trust FXY

The fund is designed to track the price of the Japanese yen, and trades under the ticker symbol FXY. With an AUM of $219.9 million, the fund charges 0.40% in fees. It trades in average volumes of about 105,000 shares a day (read: Safe Haven ETFs to Grab Amid Middle East Tensions).

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Invesco CurrencyShares Japanese Yen Trust (FXY): ETF Research Reports
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