Market Overview

Yen Plunges as Central Bank Intervenes

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The Japanese yen plunged in Thursday's trading as the Bank of Japan intervenes to weaken the yen. Presently, the U.S. dollar added 3.04% to its value against the yen to trade around ¥79.38, while the euro stands around ¥113.31, or 2.7% above its previous close.

On Thursday, the Bank of Japan sent the yen tumbling after announcing measures to contain its rise. The yen rose around 5% in the last month alone, too much for the Japanese authorities to stand by idly, it seems. Japan's central bank left its interest rates, which are currently between 0% and 0.1%, on hold. More importantly, the central bank announced it will increase the size of its asset buying fund to ¥15 trillion from ¥10 trillion.

The yen has been rising as a result of the debt crises in the Eurozone and the United States. Japan's authorities were not too pleased about it as strong yen makes Japan's exports less competitive in the global markets. Many analysts place their hopes on Japan's powerful exporting sector to push Japan out of doldrums created by the twin disasters.

This is the second time this year that the Japanese authorities have intervened in the currency markets. Following the devastating natural disasters that have struck Japan in March, the G7 countries made an orchestrated intervention to weaken the yen, the first time the group made such an effort since the year 2000, when the group came to the euro's rescue. This time, however, Japan acted on its own.

The Bank of Japan's move comes after similar effort by the Swiss central bank. In the past 52 weeks, the franc increased its value against the greenback by 36% and by 26% against the euro. It seemed only the sky is the limit for the franc, so the Swiss National Bank had to step in. The Swiss central bank surprised the markets on Wednesday by cutting its interest rates from 0.25% to as close to zero as possible. At the same time, the central bank pledged to increase monetary supply in order to further weaken the franc. At around 6:24 am GMT, the greenback added 1.02% to its value against the franc to stand around 0.7782. At the same time, the European currency recovered some of its losses against the Swiss currency, trading around 1.1114, or 0.71% above its previous close.

Like Japan, Switzerland is an exports-led economy. Even though the performance of the Swiss economy has been stellar in recent years, at least compared to other developed nations, strong franc threatens to hurt the Swiss producers as it makes exports more expensive and imports cheaper. However, it is not clear how much the Swiss National Bank can do to contain the rise of the franc. The strength of the franc has little to do with the country's interest rates. Instead, the franc is skyrocketing because traders view the Swiss currency as a safe-haven in turbulent times. As both the United States and the Eurozone are pressed by debt problems, which threaten the world economy's recovery, traders are increasingly fleeing to the safety of the franc, and gold for that matter. The actions by the Swiss central bank have pushed the yellow metal to new heights. Presently, gold trades around $1,663.45, or 0.08% below its previous close, while silver retreated 0.26% to stand around $41.67.

ACTION ITEMS:

Bullish:
Traders who believe that the actions of the Japanese and Swiss central bank will be in vain, and that the yen and the franc will keep rising due to debt problems in the Eurozone and the United States, might want to consider the following trades:

  • CurrencyShares Japanese Yen Trust ETF (NYSE: FXY) is a long play on the yen. FXY may rise if the yen appreciates.
  • ProShares Ultra Yen ETF (NYSE: YCL) is another long play on the yen. However, YCL should rise more than FXY if the yen appreciates.
  • CurrencyShares Swiss Franc Trust ETF (NYSE: FXF) is a long play on the franc. FXF may rise if the franc appreciates.

Bearish:
Traders who believe that the central banks will be able to push the values of the franc and the yen down may consider an alternate positions:

  • ETFS Short Japanese Yen Long US Dollar ETC (Sterling) ETF (SJPP) is a short play on the yen. SJPP may rise if the yen depreciates.
  • ProShares UltraShort Yen ETF (NYSE: YCS) is another short play on the yen. However, YCS should rise more than SJPP if the yen depreciates.
  • ETFS Short Swiss Franc Long US Dollar ETC ETF (SCHF) is a short play on the franc. SCHF may rise if the franc depreciates.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Posted-In: EurozoneLong Ideas News Short Ideas Forex Economics Trading Ideas ETFs

 

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