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Recommendation and Trading Idea
Beyond FRB Chairman Ben Bernanke’s and President Bush’s often positive remarks about the U.S. Economy, it is an undeniable fact that investors are currently wary of U.S. markets. As aforementioned, there are strong trends-based speculations about the further weakening of the US Dollar and the relative strength/appreciation of the Japanese Yen. The market speculations are rooted in reasons which include: (1) the U.S. subprime mortgage crisis, (2) a probable interest rates hike in Japan, and (3) a probable interest rates reduction in the United States. My recommendations include:
- Abandonment of Carry Trading
- Trading (Selling) U.S. Dollars against Japanese Yen
- Buying Japanese Yen with U.S. Dollars
- Buying Put Options of USD/JPY
Carry trading used to be an attractive trade for reasons of simplicity and convenience. It has proven to be a profitable trade too; reasonable yields can be expected with minimal risk. However, there are expectations of a USD/JPY rate decrease in the near future, implying a currency appreciation or increase in value of the Japanese Yen. Buying preference should, therefore, be given to the Japanese currency for higher future profits. In contrast, the US Dollar is an unwise investment choice; investments in the currency will, more probably, incur the investor a loss.
Recommendation for Market Professionals
For those who are familiar with currency option trading, my advice is to buy put options for USD/JPY. Put options allow the investor to sell the security at the purchase price in the future, even in the midst of a market price decline of the particular put option. For instance, if you bought a USD/JPY put option at a price of 112 and with a maturity of three months, you can still sell a USD/JPY put option at 112 at the time of maturity even if the USD/JPY put option’s market price is already lower than 112.
Therefore, even with a prevailing market price of 108 after three months, you can still sell the put option at 112 and gain some profit. The price of USD/JPY put options is actually rising recently because of expectations of lower USD/JPY rates in the future. The investors’ goal is to invest and sell them at a higher price in the future. It is definitely worth paying a little extra for put options and anticipate higher future profits.