USDJPY is perhaps the most important currency exchange in the Forex market. After the roaring years of the carry trade, the volatility excesses of recent years may have created interesting opportunities, let’s see which ones
Today we focus our attention on the currency market, and in particular on what I personally believe is the most important cross in the world and therefore the one to monitor most carefully.
I’m referring to the Dollar/Yen exchange rate (USDJPY), a cross that I believe is still more important than the Euro/Dollar. Perhaps I personally think the Dollar/Yen exchange rate is the most important because it reminds me of the roaring years, I am referring to the fabulous 90s.
People of a certain generation will certainly remember the trades named “Carry Trade”. The carry trade in short is a financial transaction that consists in trying to make a profit by borrowing in the currency of a country with low interest rates, to invest the proceeds in a country with high interest rates.
Well, the currency chosen to borrow, as mentioned, had to be a currency with low interest rates, and for this reason, therefore, the Japanese yen was used, while the currency in which the loan was invested was not usually the American Dollar, but the Australian or New Zealand Dollar precisely because they guaranteed higher interest.
Well, it is evident that by operating in carry trades one is mainly exposed to two types of risk, credit risk and currency risk. The credit risk, of course, can be limited by using only types of prudent investment, such as government bonds or securities guaranteed by public bodies, clearly by operating in this way, i.e. by limiting the credit risk, we will also reduce the potential gain of the operation in carry trades.
The other aspect is even more important, I am referring to the currency risk, i.e. the risk due to the change in the exchange rate, the cross between the two currencies in fact substantially affects the return of the carry trade operation.
If the currency in which one invests were to devalue compared to the one in which one borrows, it is clear that this would reduce if not completely nullify the earnings of the carry trade operation, in some cases the operation could be concluded with a loss, rather than a gain.
So how do you potentially reduce this risk? Also in this case the answer is obvious, we had to borrow in a currency that was still considered "strong", for this reason the Yen was chosen. But the Yen has proved to be an extremely volatile currency over the last twenty years, thus increasing the risk for those who operate in carry trades. To give you an idea of the volatility of the Japanese currency, suffice it to say that the dollar/yen exchange rate at the end of 2011 had even dropped below 80, i.e. 77 yen per dollar was sufficient, evidently a sensational overvaluation of the Japanese currency.
In fact, in the following three years the dollar/yen cross rose to 120, a cross which clearly evaluated the exchange rate between the two currencies in a decidedly more correct way. There followed a period in which the yen strengthened again, but the cross, however, never fell below the 100 level again.
And we arrived at the beginning of last year. Starting from 2021, the yen has entered a bearish phase, but it is with the beginning of the current year that we have witnessed a real collapse of the Japanese currency, in other words, the dollar/yen exchange rate has literally soared .
The cross between the dollar and the yen which at the beginning of the current year was traveling in the 115 area has soared in 10 months, even exceeding 150. In short, from an overvaluation in 2012 of the Japanese currency we have moved on to an undervaluation in 2022.
I’ve long argued that the yen’s downtrend was running out of steam. It has been said that the Bank of Japan intervened, and this certainly happened, but beyond the interventions of the Central Bank it was clear that a change to 150 did not make sense.
However, one cannot fail to point out that Japan is certainly a country that, from a financial point of view, we could define as an "anomaly".
Japan is in fact, as is known, the country with the highest public debt-to-GDP ratio in the world. A monstrous public debt, largely in the hands of the Bank of Japan as well as national institutional investors. Foreign investors are staying away. However, even taking into account this "monster" debt, an exchange ratio of 150, as I have repeatedly pointed out, was to be considered excessive.
And in fact from the third ten days of October the exchange rate has progressively decreased. It is now difficult to say how far it will go, but personally I see a correct exchange between the dollar and the yen within the 120/130 range, so I remain bullish on the yen and bearish on the dollar.
Original article published on Money.it Italy 2022-12-02 07:05:00. Original title: Dollaro-Yen, finita l’epoca del carry trade, quali occasioni offre questo cambio oggi?
