How to make money from the Trade War .... assuming it goes to plan, that is
ref: -"Short Aussie. Long Yen Is the Hot New FX Bet for Trade
War”, Bloomberg Markets 22/5/19
Investors find things a lot easier if they are not required to
make decisions based on their prognostications for the future. If they only had
to buy something nice and safe with a comparatively decent yield for example...
well, life would be just dandy (although possibly not as dandy as it used to be
now that yields generally are so low). But the fact is that very few investment
strategies are so simple that they can ignore what might happen in the future,
not least because it would be irresponsible not to take protection against the
possibility of events conspiring against you.
Of course, many spend much of their time formulating a view of how
things will pan out. If they have the requisite confidence in their predictive
abilities -- and that's not always an easy discipline to master -- they then
have to decide what trading decisions they should be making as a result in
order to save or make money. That too is not always straightforward.
This example's pretty simple, though... and it's a strategy born
against the background of deteriorating trade conflict and the growing belief
that there's little chance of an improvement in US/China relations before the
G20 summit at the end of June. In those circumstances, it's perfectly logical
to want to sell the Aussie Dollar and buy the Japanese Yen. The fortunes of
Australia's currency are closely associated with those of China since China is
Australia's biggest trading partner by a distance. So much so that the Aussie
dollar is regarded as a proxy for the Chinese Yuan. Australia's economy,
heavily reliant on buyers of the products of its huge commodities sector, is
vulnerable to falling demand brought about by a slowdown global growth in
general and in China in particular.
As for the Japanese Yen, it's the ultimate safe-haven currency for
times of stress and ticks all the key boxes for that description. (Just to
recap Stable government/financial/legal system, Good liquidity, and Current
Account surplus. In addition, Japan's vast holdings of foreign assets mean the
Yen benefits from repatriation in a risk-off environment, just as it does from
the reversal of Short Yen carry-trades.)
Bearing all that in mind, it's not a surprise to learn that a look
at the options positions held by traders in the G10 currencies reveals that
they are most bearish on the Aussie and most bullish on the Yen, and a strategy
of selling AUD and buying JPY is hard to argue with... in theory. Also
supportive is speculation that Australia's struggling economy will require
interest rate cuts, whilst with rates already negative in Japan that's not an
option open to the Bank of Japan. Thus, we have the potential for the interest
rate differential supporting the Yen, which is definitely not something anybody
gets to write very often!
As ever though, traders need to look at the timing. After all,
AUD/JPY has already fallen from nearly 84.00 in December and above 80.00 a
month ago to its current level of just below 76.00. But Citigroup sees the pair
falling to 72.75 within a couple of weeks, and other players are calling for
levels below 70.00 with a couple of months. There would seem to be a lot more
in this trade PROVIDED THAT one believes that the prospects for the trade
conflict will remain bleak and markets will remain nervy and, in a risk, -of
the frame of mind. If that turns out to be the case, the suggestion is that
there's still money to be made.
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