Currency exchange-traded funds (ETFs) make the foreign exchange (forex) market more accessible for market participants. Individuals can buy or sell a currency fund similar to an equity ETF.
Nonetheless, currencies behave differently than company shares, as the swings in currencies can be rapid, big and usually unpredictable. Changes in domestic and foreign interest rates, national debt levels and trade deficits, as well as global and regional political and economic developments all affect the value of a given currency. Therefore, potential investors need to appreciate various forex dynamics before committing capital into a currency ETF.
We recently covered the Invesco CurrencyShares® British Pound Sterling Trust (NYSE:FXB) which tracks the price of the British pound sterling against the US dollar. Today's article looks at the yen, the national currency of Japan, which has the world's largest gross domestic product (GDP) behind the US and China.
Despite the size of the economy, Japan has had low economic growth rates since 1990, when the country's equity and real estate markets collapsed. Since then, Japan has had continuous fiscal policies to provide tailwinds to the economy.
Over the past year, the government has taken various measures to alleviate the pandemic's adverse effects, too. In the second half of 2021, Deloitte expects that Japan's economic "growth will accelerate, thanks to sizeable fiscal stimulus at home and abroad.”
Most readers would recognize the country's currency by the abbreviation JPY, one of the most widely traded fiat currencies worldwide (after the US dollar and the euro). In Asia, JPY is the most traded currency.
A large number of traders regard the yen as a safe haven, especially when they fear global equities could be about to fall. The yen's potential strength typically means risk aversion worldwide. So investors could go long yen as a portfolio hedge while keeping their equity portfolios.
The chart below shows the relationship between the USD and JPY since 2007. Readers would note the decline of the dollar during the Great Recession over a decade ago.
Research by American Express highlights:
"The Japanese yen, another critical safe haven, was the only Asian currency to appreciate during the Great Recession, impacting the global economy and altering the balance of power in global FX markets.11 According to CNN reports at the time of the crisis, because Japan is a major exporter of goods, a strong yen can 'wreak havoc on world markets' and further affect economic and financial stability for the entire global economy."
With that information, here's our ETF for today.
Invesco CurrencyShares Japanese Yen Trust
- Current Price: $86.76
- 52-Week Range: $85.08 - 92.01
- Dividend Yield: N/A
- Expense Ratio: 0.40% per year
The Invesco CurrencyShares® Japanese Yen Trust (NYSE:FXY) tracks the price performance of the Japanese yen. The fund started trading in 2007 and net assets stand at $159.5 million.
Year-to-date, FXY is down over 5%. The ETF hit a 52-week high in early January. Put another way, since the vaccine rollout gathered pace in many countries, the market is likely to have seen a decrease in global risks, which might explain the decline in the value of JPY.
Some readers might want to compare the moves in JPY to those in Nikkei 225, the leading index of Japanese stocks. In January 2021, the index hit a 30-year high. Since then, it has been trading sideways.
Going forward, those investors expecting fundamental weaknesses in the global economy could potentially go long FXY, for example, as a hedge for their equity holdings. However, they would also need to keep abreast of the developments in Japan, including the GDP, inflation rate and consumer price activity.
On a final note, short-term traders who are bearish on the Japanese yen against the greenback could consider using a leveraged and inverse ETF, namely the ProShares UltraShort Yen (NYSE:YCS). It could be appropriate for experienced traders who seek a return that is -2x the return of its underlying benchmark (price performance of the Japanese yen versus the US dollar) in a single day. So far in the year, YCS is up over 11%.
As we have discussed before, such ETFs can be valuable investment tools. However, it is crucial for market participants to appreciate that those who hold leveraged ETFs for periods longer than a day expose themselves to substantial risk. Therefore, these funds are not appropriate for long-term buy-and-hold portfolios.