USDJPY bullish but meeting resistanceUSDJPY is continuing to be bullish, at least in the weekly chart, with MACD and VolDiv supporting in bullish alignment.
141.6 is the expected resistance, thereafter, 134 a good support.
RSEY1! trade ideas
SHort -The line I drew worked well for the bounce of the JPY which means that may pairs with with JPY in them go down when the index goes UP.
I put an area there for a potential retest and potential reversal or accumulation before another push up.
This could mean that the shorts with JPY might reverse of take a breather. I might get out based on this resistance.
JPY pairs shortI am partly using this chart of the JPY in order to trade the pairs like NZDJPY, USDJPY, etc.
Again, the JPY index could resume a drop very soon or could go and rests the pivot above.
If it does so, we will have some nice drops on many JPY pairs.
Trigger for my JPY trades. I tend to believe that the JPY might go a bit lower before a reaction.
I am watching this carefully for a potential dump in the other pairs like GBPJPY or NZDJPY for example.
Sometimes the market tries to catch with early entries before on last push in the initial direction to trigger break out trades and trigger some stops as well. Then the real flush happens after. There is a possibility of some distribution for a few days as well.
I am in one short only now, small position. Lots of missed opportunities if the dump happens right now at those levels but I am simply waiting for one more push down with the JPY index so we can get a reaction across most pairs.
Daily Update May 11th UJ 2023Hello Traders!
Dollar has moved back above May opening price.
We have left a discount range and could see the strong dollar push possibly.
Daily Update May 2nd 2023Hello Traders!
This is my thoughts for the day.
I would like to see a higher swing low.
Wednesday or Thursday can be the of the week.
Yen Step Back, Two Steps ForwardDespite sharp inflation, the Bank of Japan (BOJ) left YCC unchanged on March 10th. This was Haruhiko Kuroda’s last meeting as BOJ Governor. Japan is still struggling to stoke growth at risk of sustained stagflation. Hence, his decision to leave rates intact was no surprise.
Kuroda left the YCC unchanged. Analysts expected him to scrap the YCC so that the new incoming governor, Kazuo Ueda could start afresh. Hopes of change are now expected at the next BOJ policy meeting on April 27th.
Kuroda leaves behind a mixed legacy. His strong monetary stimulus lifted the Japanese economy out of deflation at the cost of hurting bank profits with ultra-low rates. Growth has remained tepid.
Kuroda has been a source of stability. More than what was needed in the staid land of the rising sun. Now, the monetary policy landscape is expected to shift as Ueda takes charge.
New BOJ leadership and an aggressive US Fed will create near term weakness in JPY followed by medium term strength.
This case study analyses a two staged positioning in CME Japanese Yen Futures to harness yield from anticipated currency moves.
Change of Guard at the BOJ
Under the new governor, definitive shifts are afoot. Inflation in Japan is non-negative. Really? Yes. Not only non-negative but also at levels unseen in 43 years.
Kuroda may not have radically transformed Japanese economy, but he managed to revive its equity market. The risk of uncertainty and volatility exists once he leaves the office.
Markets are used to perennial Japanese low inflation, and to a consistent central bank leadership. Both are now going or gone.
Another big shift is BOJ's more definitive independence. While separate from Government of Japan, BOJ was seen as being an integral part of Abenomics to snap out of deflation. The Kishida-Ueda relationship is different.
Prime Minister Kishida has not outlined a particular direction on macroeconomic policy. Politically, the LDP is far from united, not least on fiscal and monetary policies. Kishida’s base of support within the party is fragile, and his approval ratings have been in a prolonged slump.
As a BOJ governor, Ueda comes from an unconventional background. He is the first academic to assume leadership of BOJ. He has not managed a large organization. He is knowledgeable about monetary policy and is a protege of Stanley Fisher.
What, then, can we expect from Ueda? He is not convinced that inflation is sticky. Ueda maintains that “…inflation is led by cost-push factors” and “it will still take time to achieve sustainable inflation.” It does hint that he isn't someone who will make any sudden major moves.
That said, in a parliamentary hearing earlier this month, Ueda hinted that the current YCC was unlikely to survive. Engaging the market is essential he said before adding that “in some cases, adding a surprise factor is unavoidable.”
There is growing evidence emerging from the annual “shunto” (a big wage negotiation between unions and employers) that workers are asking for the largest raise in base pay in 25 years.
Some Japanese employers have already raised wages sharply higher with case in point being Fast Retailing (a Japanese listed firm and parent company of Uniqlo) which raised pay by 40% earlier this year.
Until now, it has been possible to attribute Japan’s inflation to the rise in the cost of imports driven by weak yen. Big wage increases would change that.
However, the latest data, published Tuesday, shows that wage growth is not rising as fast as expected. In cash terms, it reached the highest level in decades last year, but the January figure was far lower. Real wages adjusted for inflation have been falling the most since 2009.
Balancing growth while keeping inflation under control is not a small feat.
Next BOJ policy meeting is more than a month away. Meanwhile, the US Fed is becoming more hawkish in its fight against domestic inflation. Another rate hike by the US Fed will further weaken the fragile Yen.
The US macro environment is making an already complicated situation even more difficult. The failure of Silicon Valley Bank along with closure of Signature Bank and Silvergate Bank is testing the Fed’s wit. US Inflation continues to remain hot and three times the Fed’s target. With the liquidity backstop in place, the Fed is likely to jack up its rate by another 25 basis points when it meets on March 22nd. CME’s FedWatch tool pegs the likelihood of that happening at 82% as of March 14th.
Against that backdrop, Ueda could do one of the three once in office – (1) further widen the 10-year JGB interest rate band, (2) target shorter term yields & thereby reduce JGB holdings, and (3) abandon yield targeting altogether.
Options Markets are Bullish JPY/USD
Options on CME’s Japanese Yen futures have an overall Put/Call ratio of 0.56 across all expiries, indicating that investors are expecting the Yen to weaken.
In sharp contrast though, options for the July contract show a deviation from the trend with a Put/Call ratio of 2.6x. This coincides with the release of the 2nd Outlook Report by the BOJ after Ueda takes over, indicating the market expectation on Yen’s reversal versus USD starting July.
How much more JGB can BOJ keep buying to sustain YCC? Can this last?
Last December, the BOJ tweaked its YCC policy, to allow the 10-year Japanese Government Bonds (JGB) yield to move 50 basis points (bps) on either side of its 0% target, wider than the previous 25 bps band. The move stunned markets as BOJ hinted at monetary tightening after having stuck to its ultra-loose policy stance for a long time.
YCC tweak spilled over into January as BOJ was forced to purchase a record $182B of JGB to defend its higher yield cap from breaching the ceiling of 0.50%. The BOJ now holds more than 50% of JGB, making the situation ever more unsustainable. Adding to the JGB burden, BOJ also owns the majority of domestically listed exchange traded funds (ETFs).
Besides massive JGB purchases, the BOJ remodeled in January a funds-supply operation into a tool to prevent yields from rising rapidly.
Beyond the current short-term loans, the BOJ amended the rules to offer funds extending up to 10 years with variable rates. In January, BOJ provided loans of 3T Yen in the January offer before extending the terms of the loan to 10-year for subsequent loans. In February, BOJ tweaked the fund-supply policy terms, including the quadrupling of minimum lending fee from 0.25%-1%, to limit the short-selling of JGB’s, this indicates that the BOJ is having to use all tools at their disposal in order to defend JGB yields from rising above their defined cap.
The BOJ defended yet another attack on the YCC again in February prompting a further $2.2B of JGB purchases to keep yields from breaching the ceiling.
Economists anticipate that Ueda will fundamentally revisit YCC before BOJ lands in crisis.
Ueda starts on April 9th. It is unlikely that he will make any radical moves instantly.
Meanwhile, Fed Chair Powell is going all guns blazing to tame inflation down. Jobs data released last Friday showed the creation of 311,000 jobs smashing expectations of 225,000 jobs indicating a tight labor market. A strong labor market risks fueling a wage-inflation spiral, leaving the Fed with no choice but to jack up rates further.
Two Stage Trade Setup to Gain from Near Term Weakness & Medium-Term Strength
CME’s Japanese Yen Futures provides investors an exposure of 12.5 million Japanese Yen for every lot with the price quoted in USD per JPY increment. Every 0.0000005 change in JPY provides an increment of $6.25 in contract value.
With the USD expected to strengthen in the near-term, JPY will weaken until the next policy meeting on April 27th. As such a short position using CME Japanese Yen futures expiring in June (6JM2023) would provide a reward-to-risk ratio of 0.6x.
Stage 1
Entry: 0.0075390
Target Level: 0.0074550
Stop Level: 0.0076670
Profit at Target: $1,050
Loss at Stop: $1,725
Reward-to-Risk: 0.6x
Stage 2
Thereafter, if Ueda starts to steer Japan’s monetary policy stance differently, JPY will start to strengthen in the medium term.
Following from a short position in the near term, a subsequent long position in CME’s Japanese Yen futures will allow the investor to gain from the strengthening JPY.
Entry: 0.0074550
Target Level: 0.0081445
Stop Level: 0.0072775
Profit at Target: $8,620
Loss at Stop: $2,220
Reward-to-Risk: 3.88x
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
DISCLAIMER
Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
This material has been published for general education and circulation only. It does not offer or solicit to buy or sell and does not address specific investment or risk management objectives, financial situation, or needs of any person.
Advice should be sought from a financial advisor regarding the suitability of any investment or risk management product before investing or adopting any investment or hedging strategies. Past performance is not indicative of future performance.
All examples used in this workshop are hypothetical and are used for explanation purposes only. Contents in this material is not investment advice and/or may or may not be the results of actual market experience.
Mint Finance does not endorse or shall not be liable for the content of information provided by third parties. Use of and/or reliance on such information is entirely at the reader’s own risk.
These materials are not intended for distribution to, or for use by or to be acted on by any person or entity located in any jurisdiction where such distribution, use or action would be contrary to applicable laws or regulations or would subject Mint Finance to any registration or licensing requirement.
A breakdown of my ABC trade set-up in the Australian Dollar Fut.In this video I provide another textbook chart example of what I call my ABC set-up on a 120 minute Australian dollar futures chart. I also give an explanation why trading the lagging correlated market as a trade set-up is a bad idea.
Another Momentum Divergence in the JPYUSD Futures Before BedSpotted this before heading to bed. Looks like we got the first ABC wave, however it looks like this thing could set up one more time to the short side. Sorry for the vague explanation. Hopefully the chart clarifies the idea. Good night!
Yen went stronger than expectedI would say nobody expected so good Japan economy outcome - import weak, export strong. Bravo Yen.
False Break?Hello Traders!
Yen Futures vs UJ & DXY
We can see a smash day buy setup has occurred on the monthly chart.
Did we have a false breakout and now markets are making a turning point!?
I suspect the dollar is getting weaker.
yen🎯 I will be looking for entries in the external liquidity levels as highlighted on the charts
🟩 Trading TIme
Setups must occur at these times otherwise I'm not interested.
🔵London Killzone - LOKZ 02:00-05:00 NY time // 08:00-11:00 EU time
🟢New York Killzone - NYKZ - 07:00-10:00 NY time // 14:00 - 17:00 EU time
🟧Entry Scheme
Never enter blindly on the level. Always look for the break of the structure and pullback as the scheme shows.
Yes, sometimes the market will not pull back and you miss a trade that's part of the game. But it's better not to be in the trade you want to be than,
being in the trade you don't want to be.
For the short trade, the scheme would be obviously an upside-down picture picture
🟦 Rules
-Skip the London session if the Asia session was trending
- Wait for manipulation at the session open, which enters HTF POI and takes out Buy-side liquidity/ Sell-side Liquidity
- Look at smart money divergence as the additional confluence
- Wait for Break of Structure ( M1 if in sync with trend / HTF BOS if counter-trend) + displacement/momentum shift M3 /M5 candle close for confirmation
- Figure out: where is your invalidation (SL) and FPOL (TP1) before entering your trade
- Enter short at pullback to first POI (FVG/ OTE /OB) above respective EQ ( discount ) of Return to origin area on lower timeframe
- Set SL above swing low of manipulation, as price already took LQ out it should not go there again.
- When the price moves 50% of the expected Target range, the stop loss can be trimmed by 25%
- When the price moves 75% of the expected range the stop loss can be trimmed to breakeven
- Never trade a POI that has liquidity resting above (short) or below (long),
- Don't enter when FPOL (for example swing low/high) has been hit before getting you into the position
- Never enter a trade right before news events.
- Don't try to predict the market, just take 1:3 RR on the level and get out.
- This is intraday trading but there is no trade every day.
Pick just the best setups. In theory, we have 2 pairs, 2 trading sessions 5 trading days in a week its 20 opportunities.
You don't need to trade them all. With 1:3 RR, making consistently 3 good trades in a week will put you into top 1% class of traders.
🟦Market Maker model Schematics
🟪Smart Money Divergence
The dollar index and USD pairs usually trade asymmetric, for example, DXY making higher highs will result in $EURUSD making lower lows and vice versa. When the price on one has lower lows, it is expected that the other should reach higher highs. When this does not occur, we have smart money Divergence. This is suggestive of major accumulation/consolidation in advance of a major move in the opposite direction.
This is just the basics of my strategy, but enough for you to know what to do on the levels.
👊 BRUCE LEE´S RECOMMENDATIONS:
1 ) “Adapt what is useful, reject what is useless, and add what is specifically your own.”
- Inspired by elements of Market Profile, ICT, and SupplyandDemands strategies I adapted what is useful, rejected useless and added specifically my own parts.
2) “I fear not the man who has practised 10,000 kicks once, but I fear the man who has practised one kick 10,000 times.“
- The quote above teaches us about mastery. You don't need to know 5 strategies, tenths of formations, or have 20 pairs on the watchlist. Learn 1 setup pick up 2 pairs and practice them 10 000 times, and become a specialist.
If you have any questions write a comment I'm happy to help
Good luck
Dave FX Hunter
yen🎯 I will be looking for entries in the external liquidity levels as highlighted on the charts
🟩 Trading TIme
Setups must occur at these times otherwise I'm not interested.
🔵London Killzone - LOKZ 02:00-05:00 NY time // 08:00-11:00 EU time
🟢New York Killzone - NYKZ - 07:00-10:00 NY time // 14:00 - 17:00 EU time
🟧Entry Scheme
Never enter blindly on the level. Always look for the break of the structure and pullback as the scheme shows.
Yes, sometimes the market will not pull back and you miss a trade that's the part of the game. But it's better not to be in the trade you want to be than,
being in the trade you don't want to be.
For the short trade, the scheme would be obviously an upside-down picture picture
🟦 Rules
-Skip the London session if the Asia session was trending
- Wait for manipulation at the session open, which enters HTF POI and takes out Buy-side liquidity/ Sell-side Liquidity
- Look at smart money divergence as the additional confluence
- Wait for Break of Structure ( M1 if in sync with trend / HTF BOS if counter-trend) + displacement/momentum shift M3 /M5 candle close for confirmation
- Figure out: where is your invalidation (SL) and FPOL (TP1) before entering your trade
- Enter short at pullback to first POI (FVG/ OTE /OB) above respective EQ ( discount ) of Return to origin area on lower timeframe
- Set SL above swing low of manipulation, as price already took LQ out it should not go there again.
- When the price moves 50% of the expected Target range, the stop loss can be trimmed by 25%
- When the price moves 75% of the expected range the stop loss can be trimmed to breakeven
- Never trade a POI that has liquidity resting above (short) or below (long),
- Don't enter when FPOL (for example swing low/high) has been hit before getting you into the position
- Never enter a trade right before news events.
- Don't try to predict the market, just take 1:3 RR on the level and get out.
- This is intraday trading but there is no trade every day.
Pick just the best setups. In theory, we have 2 pairs, 2 trading sessions 5 trading days in a week its 20 opportunities.
You don't need to trade them all. With 1:3 RR, making consistently 3 good trades in a week will put you into top 1% class of traders.
🟦Market Maker model Schematics
🟪Smart Money Divergence
The dollar index and USD pairs usually trade asymmetric, for example, DXY making higher highs will result in $EURUSD making lower lows and vice versa. When the price on one has lower lows, it is expected that the other should reach higher highs. When this does not occur, we have smart money Divergence. This is suggestive of major accumulation/consolidation in advance of a major move in the opposite direction.
This is just the basics of my strategy, but enough for you to know what to do on the levels.
👊 BRUCE LEE´S RECOMMENDATIONS:
1 ) “Adapt what is useful, reject what is useless, and add what is specifically your own.”
- Inspired by elements of Market Profile, ICT, and SupplyandDemands strategies I adapted what is useful, rejected useless and added specifically my own parts.
2) “I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times.“
- The quote above teaches us about mastery. You don't need to know 5 strategies, tenths of formations, or have 20 pairs on the watchlist. Learn 1 setup pick up 2 pairs and practice them 10 000 times, and become a specialist.
If you have any questions write a comment I'm happy to help
Good luck
Dave FX Hunter
6JH23 Short 1/19/23I am working on better understanding supply and demand, as well as analyzing trends across time frames. I have noticed a weakness of mine is missing the forest for the trees, for example finding a short opportunity but the longer term and even medium term trend is up.
HTF- downtrend
MTF- uptrend
LTF- downtrend to neutral
In this trade I was looking for a roughly 3R scalp. It broke the microKPL on the 30 minute chart. I went ahead and put the trade on with my OCO stop and limit order and went to bed.
When I awoke, price had moved 2/3 of the way to price target in my favor. We did get a retest of KPL breakdown area and that entry would have had an even better R:R, but I was asleep so it's all good.
I moved to the 5 minute chart and put a downtrend line on the top of the candles to close on a break.
I manually closed when it started to show signs of stalling just above the PT.
Timing on taking profit ended up being good and I had a nice 2.5R trade.
*Acronyms*
HTF - Higher Time Frame
MTF- Medium Time Frame
LTF- Lower Time Frame
KPL- Key Price Level
PT- Profit Target
Yen's gains look cappedThe end of an era
The global stock of bonds yielding sub-zero yields has been erased at the start of 2023, after peaking at US$18.4Trn in late 20201. The fight over inflation has caused central banks from the US, Europe, UK and across the world to exit their low to negative interest rate policy. Even the Bank of Japan – the world’s last dovish monetary authority- has left the sub-zero club and is inching towards normalisation.
BOJ policy shift
The Bank of Japan (BOJ) unexpectedly widened its target range for the 10-year Japanese Government Bond yields (JGB) from ±25Bps to ±50Bps at its December 20th meeting. Since then, the surge in 10-year JGB yields has caused a sharp rise of additional fixed rate and fixed amount purchases by the BOJ amounting to ¥17Trn. Market participants are speculating that BOJ will be forced to tighten policy even more in 2023.
Political pressure alongside costly intervention forced the BOJ to tweak policy
In 2022 – despite the BOJ keeping the Japanese 0–10-year curve fixed, sharply rising yields globally led the Yen to depreciate to a 24-year low, thereby stimulating Japanese net exports. This placed direct upward pressure on Japanese inflation via higher import prices. Japan was no longer able to sustain its yield curve control policy against a backdrop of ever-rising global yields because the interventions it needed to make in its government bond markets to defend the rise in JGB yields were becoming too costly. In addition, pressure from the Kishida administration due to concern about Yen’s depreciation pushing up prices and inflicting further damage on cabinet approval ratings.
Yen gains look capped as policy framework likely to be maintained for longer
The change in policy prompted the yen to appreciate to ¥130 versus the US dollar, a level last seen in early August. The Yen’s current rally marks a sharp turnaround from last year where investors were shorting the yen owing to the widening interest rate gap between the US and Japan. As illustrated below, an unwind -63%2 in net speculative short positioning helped drive the appreciation in the Yen towards the end of the year.
If the BOJ were to make additional adjustments, it could spur further Yen appreciation. However, we feel the BOJ probably wants to keep its modified framework in place for a longer time frame, especially now that Yen versus USD stands at more comfortable levels. This was evident from its announcement of expansion of JGB purchases to ensure yields stay in the new range.
Signs that current inflation isn’t sustainable
The more concerning reason is wages are failing to keep up with inflation. In November, inflation adjusted pay slide 3.8% which was far worse than October’s 1.2% drop, marking the worst reading in 8 years3. 2023 wage growth depends largely on the results of annual spring negotiations between corporate management and labour unions. We expect bigger raises in base pay this year than in 2022, however its likely to keep up with inflation as the global economy slows.
Japanese economy could avoid a recession in 2023
Japan’s inflation is likely to remain low in 2023, resulting in less need to tighten policy further. Japan is likely to avoid a recession in 2023. As it has yet to benefit from the re-opening trade that the Western economies have witnessed over the last two years. Consumption is likely to benefit from the economic re-opening and capex intentions are likely to rise on the back of pent-up demand for goods and services.
While goods exports could soften due to the global economic slowdown, services exports are poised to steadily improve throughout the year, led by inbound spending following the lifting of border controls by the Japanese government in October 2022. The government also launched a new economic stimulus package in October to tame inflation and cushion the blow from rising raw material prices which should support the economic recovery in 2023.
Factors underpinning the resilience in Japanese equity market performance
In the face of the global equity market turmoil in 2022, Japanese equities4 performance has been fairly resilient (-11% versus -20%5 for global equities). Japan generates a large portion (nearly 52.7%6) of its revenues from global markets. So, a weaker Yen supported its profit outlook thereby making Japanese exporters more competitive than global peers. In 2022, a number of companies announced increased dividend pay-out ratios as well as share buybacks, with the intention of protecting shareholder returns amidst the global market volatility. Pay-out ratios rose to 63% from 40%7 at the start of 2022.
JPY Basket - ShortDear All,
I believe all JPY pairs needs to long as JPY will be week again.
Please consider your Risk Management and SL properly.
Best Regards
Brando
BULLISH TRADE FOR 6JH23 - JPY/USDJapan are to revise statement with central bank to water down price target(source Reuters). If this is the case this is significant and i would expect the JPY to continue its trand up against the US dollar, taking out weekly and monthly highs and targeting the purple box which is the first area of confluence. This sits just below the 22Q3 high and the 50% retace of the entire 2022 move down against the dollar.
Long 6J Long JPY against the dollar played out. Expecting some consolodation around these levels before continuation.
JPY futures hit Cosmic Gravity 1D supportCosmic Gravity is giving bullish signals on the 1D Japanese Yen futures chart as price breaks through important resistance levels after hitting major support. Stop loss is set 2% from the current price and take profit at the top of the support channel.
Land of Rising Sun and Falling YenCME: Micro USD/JPN Futures ( CME_MINI:M6J1! )
On September 21st, the Fed raised interest rate for the fifth time. The very next day, Bank of Japan decided to keep the country’s short-term interest rate at -0.10%. On November 3rd, the Fed raised another 75 bps, and the Fed Funds rate is now 3.75-4.00%.
Interest rate spread between the two countries now reaches 4%. With Japan determining to stay accommodative, the rate spread could be over 500 basis points by early 2023.
This is show time for carry trade, a popular and time-honored forex strategy.
What is Carry Trade?
A currency carry trade is a strategy that involves borrowing from a low yielding currency to fund the purchase of a currency that provides higher interest income. This strategy attempts to capture the rate spread, which can be substantial with the use of leverage.
Carry trade is one of the most popular trading strategies in the forex market. In essence, it is as simple as "buy low, sell high”. Popular carry trades involve buying currency pairs such as AUD/JPY and NZD/JPY, since they have decent rate spreads over time.
Profit of carry trade largely comes from its ability to earn interest. Income is accrued every day for holding long carry positions. Below is a typical daily interest accrual formula:
Daily Interest = (IR(long) – IR(short)) * NV / 365
where:
IR = interest rate
NV= notional value
Another source of profit results from the exchange rate changes from the time a trade is initiated to the time it is closed, which could be illustrated by the following example.
DIY Guide for A Synthetic Carry Trade
Assumptions:
1. You have built up $100,000 in home equity from your $500,000 house
2. Foreign currencies can be bought and sold with your bank, without restrictions
3. Home equity loan costs 7.2% annually
4. Borrowing rate for Japanese Yen is 2.2%
Home equity loan rate rose sharply due to the Fed rate hikes. However, since your bank acquires cheap Yen from Japan, they could charge 2.2% and still make money. When you pledge your home as collateral, your yen loan is low risk from the bank’s perspective.
Trade Initiation:
• At USD/JPY rate of 115 (using rate at the end of last year), you borrow 11,500,000 yen from the bank for 1 year, and immediately exchange it into USD 100,000.
• You buy a 1-year Jumbo CD (certificate of deposit) from the bank, which yields 4.2% with a minimum purchase of $100,000.
Trade Closing:
• One year later, unwind the trade.
• Turn your CD in and get $104,200 from the bank.
• You exchange Dollar back to Yen at 150 (recent rate) and get 15,630,000. After paying back 11,500,000 in principal and 253,000 in interest, you net 3,877,000 yen.
• One-year return is 33.7%. Just 2% comes from rate spread (4.2%-2.2%). The rest derives from yen depreciation, which allows you to pay back the loan with fewer dollars.
In this example, we do not use leverage as home equity is in place to fully guarantee the loan. By borrowing with yen, we effectively lower the home equity loan rate from 7.2% to 2.2%. Instead of putting it in CD, you could find more productive use of this low-cost capital, such as paying down a 20% credit card debt.
Usually, interest rate spread is the main income source for carry trades with exchange rate gain as a bonus. With yen dropping to 32-year low, the latter becomes very prominent this year. Borrowing yen from the bank is equivalent to shorting the yen futures.
Hedging the Carry Trade
Most traders work with a forex broker to take on carry trades. Their trades are usually unhedged. Large leverage is used to amplify the returns from small interest rate spreads. In today’s volatile markets, naked carry trades could be very risky. Trades using 50- and 100-time leverage could easily blow up if exchange rate moves against you.
In my opinion, sizable USD/JPY interest rate spread could stay for a considerable period of time, at least throughout 2023. However, Yen may have already bottomed at 150. Bank of Japan has intervened the market by emergency bond buying.
It is a good time to do USD/JPY carry trades. However, it would be wise to protect your positions in the event of a yen rally. Yen lost some 25% against the dollar so far this year. If it rebounds just 5%, it could wipe out all the returns from interest rate spread.
CME Micro USD/JPY futures contract ( CME_MINI:M6J1! ) has a notional value of $10,000. At settlement price of 144.71 last Friday, each December contract is worth 1,447,100 yen. Initial margin is 45,000 yen per lot, or approximately $311.
If you expect yen to appreciate, consider shorting the futures. As it is quoted yen per dollar, rising yen will result in each dollar exchanging for fewer of it.
Happy trading.
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trade set-ups and express my market views. If you have futures in your trading portfolio, check out on CME Group data plans in TradingView that suit your trading needs www.tradingview.com
1D JPY futures hits Cosmic Gravity supportJPY futures price falls hard to Cosmic Gravity "S6 Line" (🧐) and reverses to head for a "Support Channel" test. Watch how price interacts with this important level as it usually serves as a signal to what's to come.
