The Return Of The Yen Carry Trade Benefits Currency Harvest ETF

Japanese stocks have been perennial underachievers. So when I suggested on December 20 that investors might benefit from WisdomTree Japan Hedged Equity (DXJ), I was asking certain readers to challenge conventional wisdom. (See “A Foreign Stock ETF For A Rapidly Declining Currency.”)

My thought process on the matter was relatively straightforward. The incoming prime minister of Japan expressed a determination to devalue the yen through unconventional bond buying measures. At the time, it appeared that those measures might even rival the U.S. Federal Reserve’s electronic money printing.

It followed that, if investors benefited by signing on for the Fed-fueled stock rally, wouldn’t they be rewarded by dancing to the Bank-of Japan’s tune as well? Indeed, as long as one had a means to hedge against the yen’s decline in value, one might profit handsomely in Japanese stocks due to the enormous increase in money supply.

Since 12/20, Wisdom Tree Japan Hedged Japan Equity (DXJ) has rocketed 13.1%. As crazy as it sounds to “strong” currency advocates, the weakening of the yen may have bolstered confidence in Japanese companies and the Japanese economy.

Keep in mind, I did not predict that the CurrencyShares Japanese Yen Trust (FXY) would lose -9.4% in six-and-a-half weeks. I made a simple observation that the 50-day trendline of the exchange-traded fund had crossed below the 200-day trendline. With the yen likely to fall further in value, I surmised that Japan Hedged Equity (DXJ) had a reasonable risk-reward relationship.

Similarly, I did not anticipate double-digit percentage price appreciation in less than two months. That’s just something that happened. And while the mainstream financial media may choose to trumpet the names of gurus who “called” Apple’s (AAPL) demise or Japan’s rise, the reality is that nobody has any way of knowing with certainty. Not me… not any individual.

Right now, in fact, I would sooner wait for an 8-10% pullback in DXJ than invest new money on a fund that has gone “vertical.” If you are invested, consider a stop-limit loss order and/or a stop-gain to lock in profits.


While I acknowledge that the Japanese yen is likely to recover some of its ground, I believe that its long-term downtrend will remain intact in the foreseeable future. What’s more, I believe we are beginning to see a return of the “yen carry trade,” where global investors borrow the Japanese yen at negligible interest rates to invest in the higher-yielding Australian and New Zealand dollars.

Enter PowerShares DB G10 Currency Harvest Fund (DBV). This exchange-traded tracker takes long futures positions in currencies associated with relatively high yielding rates and takes short futures positions in currencies associated with relatively low yielding rates. At present, DBV is effectively selling short the yen, the euro and the Swiss franc while simultaneously going long on the Australian dollar, the New Zealand dollar and the Norwegian krone.

If Monday’s (2/4/13) European flare-up is any guide, the euro is unlikely to appreciate any further in value. Moreover, a low volatility currency investment that captures yen-euro weakness as well as Australia-New Zealand dollar strength may appeal to those who worry about additional stock exposure after a 5-week winning streak.

Over the last 8 months, DBV has had solid support at its 50-day moving average. I would recommend waiting for a pullback to the 50-day.


Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.