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Nikkei longs promising, but do you hedge the yen?

Nikkei 225 looks promising

The Japanese stock market appears to be breaking higher on reports of further BOJ easing and negative-rate loans to banks. That could also be coupled with ETF purchases in what would be a direct boon to the stock market.

The Nikkei 225 broke above the March high today in what looks like a sloppy inverted head & shoulders bottom.

The measured target of the formation is a 15% rise from here but that's a hollow victory if USD/JPY rises 10-15% at the same time.

The natural inclination is to hedge. The thinking is that if the BOJ eases, it will be good for stocks and bad for the yen. That was the playbook in 2013 and 2014 and the BOJ unleashed rounds of QE.

This time, Bank of America Merrill Lynch doesn't think that's a wise trade. They suggest selling USD/JPY on strength.

"BoJ purchases are likely to crowd foreign money into the Japanese market," they write.

I disagree.

The speculative market is massively long the yen (ie short USD/JPY). The BOJ can put on the squeeze on that trade and boost domestic equities at the same time. For them, it's a great time to use what they've learned from the mistakes in January and take another shot at easing.

A popular way to make the Nikkei trade without the yen exposure over the past few years is the hedged Japanese equity ETF from Wisdom Tree. The ticker is DXJ. You'll notice it closely resembles the Nikkei, only it's priced in US dollars.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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