In yesterday's Globe and Mail, Martin Middlestaedt says Japanese yen's 40-year bull market is at a turning point. He also writes about betting against (shorting) the yen and in favour of risky assets. The recent decline (Dennis Gartman believes this is a trend to hitch hike on) of the yen is not only a welcome break for Japanese exporters, and currency speculators wishing to capitalize on its falling valuation; it is a welcome development (risk-on) for hedge funds, as it provides a basis for a resurgence in short-yen carry trades.
Here are some snippets:
- Dennis Gartman, is convinced that the long advance of the yen is finally over. He’s urging investors to sell the currency short, a trade he thinks will work for years as Japan’s economic problems continue to grow and the currency takes a drubbing.
– “I think it’s the trade of the next 10 years,” says Mr. Gartman of the Gartman Letter, a market advisory service. “The yen is doomed fundamentally. Japan just has so many problems, none of which are going to go away anytime soon.”
– Its government debt is twice the size of its GDP, the scariest ratio in the developed world. To make matters worse, its lofty currency is an obstacle for its exporters, it has been fighting persistent deflation, and its population is aging rapidly.
– “This is one of the slowest moving train wrecks in the history of finance, but we’re just not quite sure when it clicks over,” says Andrew Busch, global currency strategist at Bank of Montréal’s investment arm.
– Camilla Sutton, chief currency strategist at Scotia Capital, says sentiment “used to be quite bullish for yen for a very long time,” but the market view has “turned wildly negative just over the last few weeks.”
– Much of the yen weakness occurred after the Bank of Japan said in February that it would buy ¥10-trillion worth of government bonds – in effect printing money to finance the government’s debt.
– Another approach advocated by Mr. Gartman has been to buy futures contracts on gold and other commodities and simultaneously sell Japanese yen futures. If he buys contracts representing $1 million in gold, he then sells futures contracts on yen worth $1 million. “You create your own synthetic derivative” that allows purchases of assets in yen terms, he says of the strategy. “Generally I think you should buy assets in yen terms across the board.”
– These somewhat complicated trades will have supersized payouts if the yen falls and the various commodities rise, but will suffer large losses if the yen strengthens and commodity prices weaken.
– Mr. Gartman says there is an additional reason the yen will likely continue to be weak: Japanese companies want a cheaper currency to make exports more competitive. “Clearly, the Japanese corporate structure wants a weaker yen. They’re obviously cheering this on.”