How To Play The Bank Of Japan Intervention (FXY, EWJ)

It looks like the Bank of Japan may currently be intervening in the currency markets, as the yen/dollar has jumped significantly in the past few minutes and the stock market averages are well off their lows for the day.

The ratio is now 84.02/dollar, well above the 83.90 ratio we saw earlier.

To profit from this, investors may want to look at a pairs trade here.

I suggest traders may want to short CurrencyShares Japanese Yen Trust (NYSE: FXY) and subsequently go long iShares MSCI Japan Index ETF (NYSE: EWJ).

The Japanese Yen Trust ETF tracks the price of the yen. As the yen rises due to risk aversion, the share price of this ETF rises as well. Considering we have seen nothing but risk aversion since the end of April, this ETF has done nothing but go up. During that time frame, the ETF has moved from about $105 to the $117.87 where it currently sits.

I'm suggesting traders short it around here as the Bank Of Japan is considering intervening in the currency markets and it looks like it may have already started to happen.

On the other side of this trade, investors may want to go long iShares MSCI Japan Index ETF.

Some of the top 10 holdings for EWJ are Canon (NYSE: CAJ), Honda Motor (NYSE: HMC), Panasonic (NYSE: PC) and Mitsubishi. These are all names American consumers know very well.

A stronger yen hurts Japanese companies, particularly those that export their goods, such as Toyota (NYSE: TM) and Sony Corporation (ADR) (NYSE: SNE).

Conversely, a weaker yen will help exporters as it makes their goods more competitive in the global market. The majority of Japanese exporters sell their goods abroad and a weaker yen will help profits when the companies report earnings. Weaker costs and stronger profit margins on products should boost net income, and thus, stock prices.

So if the Bank of Japan finally does announce it is intervening, and it looks like it may have started to, here is a pair trade investors can mull over to profit off this.