Yen Surge Perks Up Japan ETFs

With global investors favoring the Japanese yen as a safe-haven destination earlier this year, the yen surged while damaging currency hedged exchange traded funds, such as the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ ) in the process.

The CurrencyShares Japanese Yen Trust (NYSEArca: FXY ) is one of this year's best-performing developed market currency ETFs, explaining ETFs such as DXJ and the iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ ) are saddled with almost double-digit losses. However, some technical analysts see DXJ as poised for a rebound, echoing some recently bearish sentiment on the yen.

The yen has experienced one of its biggest daily rallies since August as traders remain unconvinced that Japanese officials will do what it takes to curb the gains, even as a Ministry of Finance official stated that recent moves have been one-sided and that authorities will act accordingly, reports Taylor Hall for Bloomberg .

The statements from Japanese officials are "all the kind of stuff you typically hear before they pull the trigger," Daragh Maher, head of U.S. foreign-exchange strategy at HSBC Holdings Plc, told Bloomberg. "But the market wants to see their money before it gets scared."

However, the yen's strength has prompted questions regarding just how long the currency will keep soaring and if it is vulnerable to a near-term pullback.

"For those who still believe that it's possible for equity prices to move lower, I point to DXJ , which is the fund that combines Japanese equities with a hedged yen bet. To my eyes, this head-and-shoulders top looks like it has retraced to an appealing risk-reward ratio," according to .

Japanese equities have strengthened in the past week as the yen currency weakened. The export-heavy market has been weighed down by an appreciating JPY that recently climbed near an 18-month high.

However, reports of a deteriorating economy, disappointing stimulus measures and a strengthening JPY currency have all dragged on the Japanese equity markets. Year-to-date, EWJ dropped 6.5% and DXJ, which hedged against a weakening yen, declined 17.4%.

Consequently, more money managers are growing pessimistic over Japan's outlook. For instance, BlackRock is among firms ending their bullish call on Japan - the money manager also downgraded its outlook on Japan from overweight to neutral, citing the stronger yen's risk to export industry's earnings and increased volatility.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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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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