While 2015 was wholly attributed to the king dollar, the year 2016 (so far) can be credited to the Japanese yen. The yen outperformance came despite the Bank of Japan’s (BoJ) gigantic stimulus program and the launch of negative interest rates (read: Japan ETFs to Buy on Negative Interest Rates).
The slide in global stocks on growth worries and nagging oil prices declines bolstered the demand for safety. On the other hand, there is a slim chance of the Fed hiking rates frequently this year given the turmoil in the global market.
So, the Japanese yen became the best-performing currency this year by virtue of its safe-haven nature. The currency has gained about 6% against the greenback so far this year (as of March 1, 2016) while “it posted a 7.5% advance against the dollar in February, its biggest gain since October 2008†per Bloomberg (read: Top and Flop Currency ETFs YTD).
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Investors should note that Bank of Japan (BoJ) followed the ECB by pushing the interest rates on excess reserves to the negative territory in late January. The move was to energize the dull growth picture and boost the slackening inflationary environment. A move like this should have curbed the value of yen but in reality the currency surged.
This is why CurrencyShares Japanese Yen ETF (FXY) – which reflects the price of the Japanese yen in USD – has added about 5.4% so far this year (as of March 1, 2016). The fund has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Yen ETF Gains on Bank of Japan Stimulus Changes).
Can the Surge Continue?
There is high chance that the fund will lose its momentum in the coming days as the sell-off in the global market appears overdone. After February 2016 turned out to be the best month since 2008, the currency succumbed to a slowdown to start March. On the first day of March, FXY lost 1% as hawkish investors rushed to risky assets on cues of steady U.S. economic growth.
The U.S. economy lately rolled out a volley of upbeat economic data including manufacturing, construction, consumer spending, durable goods and inflation which catapulted into a strong greenback. It is quite likely that the yen shed gains on deficient safe-haven demand.
Meanwhile, China cut its reserve requirement ratio as part of the policy easing program which lent a fresh round of optimism to the global investors. If such events continue in the near term, the yen ETF will lose its shirt.
However, the ETF world is equipped with products, in most cases, to profit out of any situation. So, investors can definitely earn from a declining yen too by investing in the inverse yen ETF
