Member access

4-Traders Homepage  >  News

News

Latest NewsCompaniesMarketsEconomy & ForexCommoditiesHot NewsMost Read NewsRecomm.Business LeadersVideosCalendar 

USD/JPY: Bullish strategy

10/16/2012 | 06:00am US/Eastern

It has been over 20 years since Japan is plunged into deflation, monetary phenomenon that is characterized by a continuous decline in prices. Companies are no longer investing and consumption slow down, consumers constantly pushing their purchases in order to get cheaper prices. This situation inevitably leads to a slowdown in the Japanese economy that fails to pick up, despite massive injections of liquidity by the Central bank of Japan.

The BoJ under its quantitative easing should inject nearly 20,000 billion yen (about 255 billion dollars) by the end of the year. However, Japanese banks have substantial stocks of cash due to a lack of demand for credit.
 
Japan is further penalized by a strong yen that prevents a resumption of exports of the archipelago. They accounted for 17.6% of GDP in 2007 against only 11% expected in 2012.
 
Why so strong currency with a high debt ratio?

With a debt that will reach more than 220% of GDP in 2013, we are entitled to ask why the yen is considered as a safe haven. The first thing to know is that the strength of a currency is not measured by the growth potential of the country, but the stability of the currency in foreign exchange. In addition, the japanese debt is owned by 92% by domestic actors (banks, insurance companies and individuals) and 8% by foreign capital. In comparison, European debt is owned by more than 50% of non-European investors.

This is why, despite its amount of debt, Japan finance it at a rate between 0 and 1%. Residents repay the debt (through taxes) and are both creditors by investing their savings in the debt. Thus, Japan retains funding capacity and stability in yen. Thus, it is considered a safe haven in times of risk aversion and traders buy the yen.

In this context, the Japanese central bank never ends to provide liquidity in order to halt the spiral of rising yen against the US dollar hit by the economic slump in the United States. The downward trend of parity has been observed for more than 10 years. It is clear that these actions have no effect on the local currency. Various policy statements from the Empire of the Rising Sun suggest that the BoJ may soon resort to the method used by the Swiss National Bank, establishing a floor (between JPY 83 and 85) on  the currency against the US dollar and thus, to support exports for the japanese companies
 
In this context, we decided to set up a strategy of " bullish channel" which involves to sell a put option in order to finance the purchase of a call option.

Strategy
 
Purchase of a call option “out-of-the-money” with the sell of a put option “out-of- the-money”. Besides the premium should be the same for a “cash flat” strategy.
 
For a maturity of  3 months :
 

  • Strategy is winning in case of rapid increase of parity
  • This strategy is flat in case of stability or slight decline
  • Strategy is losing if the parity decline. In this case, you will have to buy the USD/JPY at the strike price (more expensive than the spot price)


 


In the latter case, there is an outperformance of the option strategy compared to a spot purchase at the moment.
 
This is an option strategy which allows to speculate without exposure to the time value, an increase of USD/JPY, within three months with much lower risk to the spot purchase.

Alexandre Nutte
© 4-traders.com 2012
React to this article
Latest news
Date Title
<1m ago CONOIL : Woodside Enters into a Contract for Reconnaissance Licence in Morocco
<1m ago MABANEE SAKC : Kuwait's Mabanee to invest USD910m on project
<1m ago JINKOSOLAR : Mexico's AS Solar places an order for 7 MW PV panels to JinkoSolar
<1m ago Samsung sells defence, petrochemical units for $1.7 bn
<1m ago Dominion buys Canadian Soalr's 20 MW West Antelope Solar Park
<1m ago YINGLI GREEN ENERGY HOLD : signs deal to supply 72 MW of PV panels for UK's Solarcentury
<1m ago REC SOLAR ASA : Hong Kong's Bluestar Elkem Investment to purchase REC Solar
<1m ago GAZPROM : and Petrovietnam sign agreement to develop Nagumanovskoye and Severo-Purovskoye fields
<1m ago ALGONQUIN POWER & UTILITIES : to add another 10 MW to Bakersfield Solar Project in California
<1m ago ALEO SOLAR : to supply 5.8 MW for Turkish PV plants
Latest news
Advertisement
Hot News 
DIXONS CARPHONE : *citigroup raises carphone warehouse price target to 480 (430) pence - 'buy'
IMPAX ASSET MANAGEMENT : Raises Dividend As Pretax Profit Rises
DRIVER : Shares Hit Seven Week High After Big Oman Contract Win
GLOBAL BIOENERGIES : Successful First Trial in Its Industrial Pilot
AUGEAN : Capital Markets Day
Most Read News
1d ago GOPRO : Hero 3 Christmas Discount Covered in New Price Guide at ReelGifts.com
1d ago APPLE : Global tablets expected to slow in 2015, led by iPad shipment downturn
1d agoDJWAL MART STORES : Cuts Nearly 30 Directors and Midlevel Managers in China--Spokesman
5h ago LEGAL & GENERAL : £2.5bn TRW Pension Scheme bulk annuity contract'
2h ago Low expectations for oil output cut as OPEC meets
Most recommended articles
6m ago EXCLUSIVE : France, Italy, Belgium may break budget rules, EU to revisit in March
6m agoDJGold Slips; Dealers Cautious Ahead of Swiss Vote
7m ago Futures modestly lower ahead of OPEC meeting
7m agoDJHamas Terror Network Uncovered in Israel
7m ago Investors keenly await remarks from incoming finance minister
Dynamic quotes  
ON
| OFF