More Pain for the Yen?

In late 2011 I started shorting the Japanese Yen. I spoke about it here, here and again here. I even tried to employ my skills in evaluating private equity deals to evaluating Japan. I was coming up empty.

I’ve employed a basic position of long the USD/JPY cross, long XAU/JPY cross and then taking small amounts of speculative capital buying long-dated puts on FXY. The results have been pretty average thus far. The USD long is working well, the long gold trade is slightly above water, while the puts on FXY have been miserable.

Timing is everything and I’m cognizant of that fact. I do however want to be positioned, because I remain unconvinced of the ability of central bankers to hold the ship together with monetary bailing twine, jawboning and any other measure they dream up.

I took the positions mentioned, not because I had carefully calculated the planetary alignments and noted that the Yen was going to get smashed as soon as Jupiter was in Mars. Frankly, like most market participants I didn’t know. What I did know was that the fundamentals supported a weaker yen, and importantly the political will to push the Yen lower was in the cards. Shinzo Abe campaigned on that very platform. From a risk/reward standpoint the risks were low while the reward was potentially very high. A speculators wet dream.

At the time we felt that establishing a core position in this trade was so important that we published a free report outlining various ways to play what we believe will be a very profitable trade. Feel free to grab a copy here.

On the 28th November our good friend and “trader extraordinaire” Brad Thomas alerted our readers in a trade alert that the Yen looked like it was turning.

Specifically he said:

The USDJPY is in a primary bull trend, has worked off an overbought condition over the last 7 months, and is now in the process of reconfirming the up-trend.

JPY Chart

I think the USDJPY is in the process of “mean reverting” at least back to the level it was trading at just prior to the onset of the GFC in 2007 (120 level). This would be about a 20% rise from current levels, which is rather material.

Brad is easily the smartest trader I know, but what has made Brad so successful has been his implementation of his views. This can make all the difference. In the trade referenced above, his strategy has been to place multiple option trades across 12 months of expiry. Namely 120,000 options expiring in 12 different time frames over the next year. (note: not long after this ZH put out a trade overview using similar principals)

At the time Brad put the alert out, all 12 trades of 10,000 USD/JPY options would have cost approx US $3,400. As of today the USD/JPY cross sits at 102.82 and the respective 12 call options across 12 months net out at US $4,198.

Whatever strategy one uses I believe that being positioned for a substantially weaker Yen is an intelligent move.

We’ll be hearing more from Brad on how he plays this as well as his many other trade ideas long into the future.

To receive Brad’s alerts (complimentary for a while longer), click here.

– Chris

Excerpted from Steven Drobny’s, The New House Of Money:

“Drobny: You’re on the tape saying that dollar/yen is going to 200.

Kyle Bass: If I’m right, it will go much further than that. I don’t think it will hit 500, but in crises, currencies swing too far.”


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