An Unraveling Trade Means New Opportunities

I have a friend that was living the American dream. He had a thriving business that was growing at a fast clip, year after year.

He continued to roll all of the profits back into the company each year so he could grow it even faster. The only problem? He had all of his financial eggs in one basket.

Eventually, that party came to an end and his $400 million company came crashing down around him.

The good news is that he’s rebuilding it and he’s wiser than he was before. All of his eggs aren’t in that one basket anymore.

If you think about it … most Americans are in the same situation that my friend was in. They keep all of their money in one place and never give it a second thought.

You see, most Americans have 100% of their money invested in America. Their savings are in dollars, their CDs are denominated in dollars, their money market accounts are in dollars and their bond holdings are denominated in dollars. Their stocks and real estate are probably in dollars also.

So you could say that most of America is “all in” – they’ve pushed all of their chips into the middle of the table. But this is a very dangerous place to be. The Federal Reserve is undermining the dollar as more money is being printed all the time, which dilutes the value of our currency. It’s almost like there is a leak in our assets that we aren’t aware of.

In fact, as I was eating turkey over the Thanksgiving holiday with my family, I stepped aside for a brief moment just to check and see what the currency market was doing, and what did I see? I saw the dollar diving yet again! Yet as many people were cutting turkey, they had no idea that the value of their currency was eroding literally as they ate.

Well, now there’s another “all in” trade that is unraveling and it’s bringing about new opportunities for the astute investor.

You see, within the last 30-45 days, the Japanese yen has broken down out of an uptrend that has lasted for almost six years.

The Yen Trade Fizzles Out

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In the chart above, you’ll see the yen making higher highs until around last November. Those highs happened on lower volume, which got my attention.

However, the top has taken a long time to form. It’s taken around a year for the yen to break its uptrend line. In fact, you’ll see from the red arches that it’s been forming a bearish Head & Shoulders pattern over the last couple of years which is another sign the yen has topped out.

When the Next Sharp Down-Move is Coming in the Yen

Once the CurrencyShares Japanese Yen Trust (FXY) – an ETF that tracks the yen – clears the 116-117 area, then we’ll see the next sharp down-move in the yen unfold. When that happens, it will be the first main sign that the carry trade is back in vogue.

What is the carry trade? It’s where someone buys a higher interest-rate-yielding currency against a lower interest-rate-yielding currency.

To put it more simply, it would be like you being able to borrow money from one bank in town at 2% and then investing it in another bank at 6%. You’d earn the spread of 4% annually on money that never had to come out of your own pocket.

Well, you can essentially do this in the currency market by buying a currency pair like AUD/JPY (the Australian dollar vs. the Japanese yen) through a forex account right here in the U.S.

You see, right now the Australian dollar earns a yield of 3.25% and the Japanese yen has a yield of only 0.10%. So there’s a spread of 3.15% to take advantage of now that the yen’s direction is heading southward, which pushes pairs like AUD/JPY upward.

We’re in this trade right now in my Currency Cross Trader newsletter service and it’s doing quite well, up over 180 pips within mere days.

But there’s a simpler way for those that are not involved in the forex market to take advantage of the sinking yen and that’s through the ProShares UltraShort Yen ETF (YCS). You can take advantage of this by buying it right through your regular stock brokerage account. But let’s take a look at what this ETF is doing on the chart below.

The Bullish Pattern Will Take YCS to $55 per Share or Higher!

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When the yen peaked last November, YCS formed a bottom. From that point on, it went on to form its first “higher low” which is the right side of the bullish Head & Shoulders pattern.

This pattern shows that more buyers are coming into the ETF since a lower low hasn’t formed, but it is on track to form another higher low.

Next we’ll see a “higher high” form in YCS. That will be the point at which it breaks through its black neckline in the pattern.

A 20% Return From YCS

Once that happens, the pattern has completed and the next bull-run is unleashed. How far can it run? There is a way to measure the minimum amount that it will run-up. You simply take the distance from the bottom trough of the head straight up to the neckline. That’s about $9 per share’s worth of distance.

You take that amount and add it to where the ETF would breach the black neckline at about $47 per share and add back in the $9 per share move. That gives a minimum price target of around $55-$56, depending upon the exact area where the neckline is breached.

So if you have a forex account, look into buying a high yielding currency vs. a low yielding currency such as AUD/JPY like we’re doing in the Currency Cross Trader service. This will allow you to pick up some interest along with the appreciation in the AUD/JPY pair.

However, if you’d just like to play the fall of the yen through your stock brokerage account, then consider buying the short yen ETF (YCS) and hold it until it nears its minimum price target. I believe it will hit this target within 6-12 months and reap an 18-20% return over that time.

I hope you had a great holiday. But be sure to get all of your eggs out of the dollar basket and also take advantage of scramble out of the yen basket too, and next Thanksgiving you’ll have one more thing to add to the list of things to be thankful for.

Have a nice day!

Sean Hyman

P.S. My Currency Cross Trader subscribers are already profiting from moves in the yen. To learn more about how you can become a subscriber, and how you can profit no matter whether the U.S. dollar goes up, down or sideways, click here to learn more.