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Three ways to play a weaker yen

In all the recent market volatility, holding the yen has been one of the more secure options for investors. But now the Bank of Japan has moved to drive it down. David Stevenson explains why, and picks the best ways to play a weaker yen.

No country wants a strong currency nowadays. It makes exports too pricey for overseas buyers. And in a sluggish world economy, every extra sale is precious.

Japan is the latest country to unload more of its currency onto the foreign exchange (forex) market. And at first glance it's worked a treat. Yesterday's Bank of Japan (BoJ) move to sell yen drove the Japanese currency down ultra-fast. For now, that has to be very welcome news for Japan's exporters.

But amid recent financial market volatility, holding the yen has been one of the more secure options for investors.

So has the yen's safe haven status now been undermined? And what should you do about it?

The Bank of Japan means business

Yesterday's BoJ intervention caught forex traders by surprise. Look at the Bloomberg print of the yen's exchange rate against sterling when the headlines hit the markets.

11-11-01-JPY-v-GBP

Source: Bloomberg

You'd expect that sort of move from 122 to 127 to the pound to take several weeks, if not months, to play out. Here it happened in about ten seconds flat.

What's more, previous interventions have seen other central banks join in. Yesterday saw the BoJ acting by itself. It shows that when a major central bank like Japan's takes on the markets, it has the power to shift prices very quickly.

Who will this help?

As we've already noted, Japan's manufacturers have been longing for a weaker yen to make their goods cheaper for foreign buyers. So if the BoJ's move helps lower the currency long-term, Japanese businesses will see their external sales and earnings boosted in yen terms. Overall profits and stock prices should benefit.

The problem, though, is that the effect of currency interventions can soon wear off. Japan's finance minister Jun Azumi may insist he's "repeatedly" said he'll "take bold action" and will keep intervening until he's "satisfied". But the country's business leaders aren't convinced.

"The currency doesn't move only by intervention", says Makoto Kubo of Tokyo-based electronics maker Toshiba tells Bloomberg. Although, "we welcome the intervention very much", says Hiroki Yoshimatsu at Mitsubishui Electric, "it's unclear how long the current level will last".

In other words, for Japan's stock market, the intervention may only be qualified good news. And if it does engineer the yen much lower, don't forget this. If you're a sterling investor in Japanese shares, you'll lose out on the currency front. So you'd also need to buy a currency fund that shorts' the yen, ie sells it, and buys pounds with the proceeds.

The best plays on a weaker yen

Something like the ETFS Short JPY Long GBP (LN: JPGB) would do that. But if that's starting to sound like too much hassle, let's look at the next potential beneficiary from the BoJ intervention the US dollar.

We've been feeling more bullish about the dollar for a few months now. Not because it's a great currency, or backed by a wonderful economy. The latter remains very dodgy. Meanwhile, the US national debt is bigger than anyone can get their head round. And a large chunk of America's local government has run out of cash.

But the rest of the world has lots of problems, too. For example, the eurozone's woes are far from over yesterday Italy's debts came right under the market's microscope. And this morning's announcement of a Greek referendum sent markets sliding again.

Despite all this, it's been the buck that's taken the hardest hammering. With US interest rates so low, traders have been happy to borrow in dollars, short' the currency and re-invest the proceeds elsewhere.

But the tide now seems to have turned for the better. The dollar is still the world's reserve currency. It retains its status as a safe haven. So governments and central banks around the world will keep holding large amounts of it. If global economic uncertainty grows, other investors will want to join them.

And BoJ interventions to devalue the yen may further help the broad upswing in the buck. Notice that when the dollar bounced yesterday against the yen, it also picked up against other major currencies too.

That's because a move like the BoJ's is highlighting the risks traders are running by shorting the dollar. Having to buy back dollars they don't have at higher prices will prove very costly. These traders might be caught out by intervention at any time. So they could soon find their losses becoming greater than their profits.


James McKeigue explains the best ways to buy gold coins and bars.

In other words, while the intervention effect' on the yen may be limited, there will be a wider positive impact on the dollar. Much less dollar shorting will mean a generally stronger US currency.

Overall, then, the buck is beginning to look an increasingly good bet. But apart from holding dollars, where else does this leave investors?

In our cover story in July, we spotlighted several UK stocks that would be boosted by a bounce in the buck. Despite recent equity market falls, these ideas still hold good and you can read about them here: Will the US dollar rise from the dead?

And what about the ultimate safe haven: gold? A stronger dollar of course, is bad for most commodity prices, which are generally priced in dollar. Yet gold could be the exception.

Central banks are buyers rather than sellers of gold. So they won't be trying to drive the price down. And BoJ intervention will mean more yen knocking around. As the central bank of a one-time safe haven is now trying hard to devalue its currency, gold is becoming an even better place to safeguard your money.

Find out about how to buy physical gold here.

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