Saturday, August 23, 2008

Japanese Yen: Hedging against falling stock markets.

Global stock markets are falling and most of them are in "bear" trend. But there is something new with commodity and currency prices. We can see sinking crude oil price and rebound for US dollar. Currency turnaround has started 1 month ago. Strengthening US dollar sent all currency ETFs to negative.

name ticker monthly

PowerShares DB US Dollar Index Bullish Fund (UUP) 5.8%
CurrencyShares Japanese Yen Trust ETF (FXY) -2.5%
CurrencyShares Canadian Dollar Trust ETF (FXC) -3.7%
PowerShares DB G10 Currency Harvest Fund (DBV) -4.0%
CurrencyShares Swedish Krona Trust ETF (FXS) -5.2%
CurrencyShares Euro Trust ETF (FXE) -6.1%
CurrencyShares Swiss Franc Trust ETF (FXF) -6.2%
CurrencyShares British Pound Trust ETF (FXB) -6.7%
CurrencyShares Australian Dollar Trust ETF (FXA) -10.3%

As you can see US dollar ETF has gained almost 6% in last month. The most averse currency against dollar strength seems to be Japanese Yen which lost only 2.5%. This slight drop is due to positive monthly trend with broad stock markets indices. During the same time Dow Jones Industrial Average increased by 0.3% and Nasdaq Composite by 4.8%. Yen is generally called is as a hedging tool against broad stock market trend with inverse correlation. Based on empirical data the highest correlation is with broad US indices (S&P500, Nasdaq Comp. and Dow Jones Ind.) which is -0.95.

Related tickers: (UUP), (FXY), (FXC), (DBV), (FXS), (FXE), (FXF), (FXB), (FXA), (DJIA), (SPY), (QQQQ)


2 Responses to "Japanese Yen: Hedging against falling stock markets."

Richard said... August 24, 2008 at 3:06 AM

Your article is interesting.

The Dollar Rally that began July 14, 2008, and which ran through August 15, really "goosed up" the consumer stock laden Nasdaq, and the financial stock dependendent Russell 2000, as is seen in the Yahoo Finance three month chart of UUP relative to the four major indices -- realtive to DIA, SPY, QQQQ, IWM.

Your research shows an unwinding of the Yen Carry Trade, which is seen in EUR/JPY, FXE:FXY falling lower 1.70 to 1.63.

What a change: the US Dollar became a destination for interest rate differential investing.

Yes the consumer currency, that is the US Dollar rose.

As you relate, the commodity currencies -- the Euro and the Australian Dollar suffered greatly.

The Swiss Franc, which is a gold reserve currency fell hard.

And the once almighty kingly, that is monarchly, British currency, is now a real dog of a currency.

But just this last week an investment sea change occurred: the USD/JPY fell, causing UUP to fall.

Also this week the Euro, FXE, and the Yen, FXY rose; with the Euro rising more than the yen.

I expect that this next week, UUP to fall more, as the USD/JPY really cuts loose.

I expect that EUR/JPY to begin to fall again, which would raise UUP and the US Dollar, $USD; but I expect the downdraft of a falling USD/JPY to overpower and UUP should fall this next week.

Vlada, Czech Republic said... August 24, 2008 at 11:18 AM

Hi Richard,
Thank you for your comment and sharing your opinion.
I checked your blog and it it very interesting.

I wanted to contact you but couldn't find any contact form. Could you you please drop me your email. You can send on
vld2czech (at)