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The Best Risk/Reward in Currencies


Why jump on the crowded EUR/USD trade? There are a number of ways to play for a weaker yen.

MINYANVILLE ORIGINAL Heading into this weekend's elections in Greece, all eyes have been focused on Europe and the euro – and for good reason. With that in mind, many investors have dived headlong into the leveraged inverse euro ETF -- ProShares UltraShort Euro (EUO). EUO shares aim to provide 2% gains for every 1% decline the EUR/USD exchange rate. This gives the average investor an opportunity to participate in a bad outcome scenario for Greece and the European Monetary Union.

While I think this is, in fact, a very critical moment for the future of the euro, there is significant risk that comes with this trade.

Risk No. 1: The short euro trade is a very crowded trade. The latest report from the IMM/CFTC shows yet another record net short position was reached in the euro last week. That makes the EUR/USD very vulnerable to a squeeze in the event that there is uncertainty remaining following Sunday's Greek elections, which is increasingly likely.

And that leads me to...

Risk No. 2: An "uncertain outcome" is quite possible, on a few fronts. First, the Greeks could fail to reach a majority vote again, as they did in May. In that case, they would still be left without a government, and yet another attempt would be made by the majority party to form a coalition. That suggests more waiting. Second, if the "anti-bailout" party is elected, expect them to soften their stance and seek to negotiate better terms with the EU/IMF in attempt to restructure the bailout terms. Some of the seeds have already been sown by EU officials in recent weeks, toward relaxing some of the austerity program for Greece. This scenario would extend the timeline and add to uncertainty, which is a risk to euro shorts.

So, the euro trade here is far from a slam dunk. Especially for those that might be intolerant of a sharp, short-term squeeze.

Where is the better risk/reward in currencies right now? Answer: the Japanese yen.

Going into tonight's Bank of Japan (or BOJ) meeting, the market has been lulled to sleep by the BOJ in recent months. After making a huge policy shift early in the year, announcing that it would target a 1% inflation rate from this point forward, the BOJ's action has shown an underwhelming sense of urgency toward achieving that goal. With that, as the meetings have passed, traders have become less interested in the yen trade, because they have become less convinced of the BOJ's conviction to follow through on its promise to end deflation.

So USD/JPY sits not far from historic low levels, and the BOJ is expected, again, to maintain a relatively passive path for monetary policy. That creates an opportunity: If it surprises, and ramps up its QE program tonight, the yen could fall hard.

Moreover, the chart on USD/JPY offers plenty of support for taking a stab at this trade.

If you look at the chart below, you can see the massive trend break earlier this year. This break represents a huge trend change in USD/JPY, a break of the four-year bear market in USD/JPY associated with the unwinding of the yen carry trade.

Click to enlarge

And you can see by following the green arrows in the chart, the BOJ is behind you. It wants a weaker yen (higher USD/JPY) and has stepped in a number of times, either officially or verbally over the past 12 months, to turn the tide, the most recent of which was on June 1, following the very weak US jobs report. The BOJ was in checking rates that day and turned the tide.

For currency traders, there are a number of ways to play for a weaker yen. But average investors can participate too, through the inverse leveraged yen ETF (ProShares UltraShort Yen (YCS)). Like the euro ETF, it aims to gain 2% for every 1% decline in the value of the yen.

For more information on which specific leveraged ETFs are the best to trade, backtested and proven highly profitable trading strategies, daily trading ideas based on macro and market news, or money management, please contact Global Investor Monthly.
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