As a veteran trader, I have a tendency to look past the day's top headlines. That's why a recent Bloomberg News story - which stated that China sold a net total of 769.2 billion yen ($9.24 billion) worth of Japanese debt in September - really caught my eye.
By itself, this story probably wouldn't be a big deal. But this development is the start of an important new trend in the global currency markets. And the following three factors tell me that we should be taking a close look at why China has decided to dump Japanese debt. For instance:
While there are other conceivable explanations, my take is that China is definitely unloading its yen-denominated holdings, and shifting its investments elsewhere as part of a much bigger reallocation strategy. As investors, this is a trend that we need to track - and to react to.
Let me explain....
The two months of net selling of Japanese debt is not a co incidence. It suggests to me that Chinese traders may believe the Japanese yen is topping out and will likely move lower in the weeks and months to come.
In fact, in the days since I initially spotted this potential trend, that's precisely what's happened.
The yen traded at its highest level in more than 15 years on Nov. 1, being quoted at 80.22 per U.S. dollar. That was just slightly below the all-time-record high of 79.75 that was established on April 19, 1995.
By Friday, Nov. 5, the yen had slipped back to 82.37 per dollar. It was trading at 83.2616 per dollar yesterday (Monday) afternoon.
And mark my words - the yen is likely headed even lower.
China pays particular attention to the strength of the yen because the Japanese debt it holds provides an extremely low yield - less than 9/10ths of 1.0% on 10-year securities, and as little as 1/10th of 1.0% on some short-term instruments.
That means that most of the gains China makes on its holdings of Japanese debt must come from currency fluctuations. So it's also possible China is simply taking profits.
Either way, we'd be wise to listen: During the worst parts of the global credit crisis a year ago, China adopted a similar course of action by cutting off purchases of European and U.S. debt - opting instead to buy much "safer" yen-denominated assets, and other "currencies" like oil, gold, and to a lesser degree, silver. All of these assets embarked upon their latest upward run right about the same time. All of them are capable of "preserving" wealth, which is what Beijing seeks.
Here's how I read this latest move: China - having achieved its goal of reserve diversification - is now looking to diversify away from the yen as a means of additional risk reduction and wealth preservation.
Given that China's currency reserves have swelled to a staggering $2.65 trillion (based on the latest estimates), this won't be a trivial move. With its shift toward consumerism, China may be forced to make other, related moves if the Asian giant is to continue its trend of reasonably orderly growth.
For most investors, the reasoning behind such moves as China's divestiture of Japanese debt isn't as important as the profit opportunities that should result.
I completely understand that sentiment - which is why I've put together three recommendations for your consideration. If you want to profit from China's sale of Japanese debt:
[Editor's Note: (**) Money Map Press LLC, publisher of Money Morning, has a commercial relationship with EverBank, and receives referral income for the sale of banking products from that firm.]
News and Related Story Links:
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.