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Japanese Prime Minister Abe's recent success in talking the yen lower against other currencies has increased fears over "currency wars." Now investors are on the hunt for the best investments to profit from central bankers' "race to the bottom" in 2013.
As we've pointed out, the Japanese have done nothing overt to weaken the yen – yet. Markets were massively long the Japanese currency and, when Prime Minister Abe called for "unlimited easing" during the election campaign last year and in the run-up to selecting a new Bank of Japan governor, that was all traders needed to hear to begin selling their yen long bets and taking out short positions.
Abe's great success was in getting the market to do all of the heavy lifting for him.
In fact, Abe has been a little too successful. Minister of Finance Taro Aso told reporters in Tokyo on Friday that the yen had weakened too quickly, which prompted an immediate reversal in the currency markets.
Aso's comments came after remarks by European Central Bank President Mario Draghi Thursday raising concerns that the recent strength of the euro might derail the recovery just gathering momentum in Europe now.
Looking at the interplay of comments from Draghi and Aso last week, it is tempting to think that all of this commotion in the currency markets is being coordinated at the highest level of central banking.
But, with the exception of China, which has been quietly pushing the renminbi toward the lower end of its trading range, no one has done anything. It's all just talk.
In the financial markets, however, talk is a big industry. Talk gets people to put on trades and that is how bankers and brokers make money.
This leaves investors wondering the best currencies to invest in to profit from these fluctuating values, which is why Morgan Stanley developed a currency war basket trade.
The Best "Currency War" Investments 2013
The basket consists of long positions the euro, the kiwi (New Zealand dollar) and the Mexican peso against short positions in the yen, the South Korean won and the Peruvian nuevo sol.
The creators of the "currency war" basket argue that Japan, South Korea and Peru will be more effective in depreciating their currencies than the Eurozone, New Zealand and Mexico even if all of these economies pursue easy money policies to support their economies.
There are only a few currency ETFs that trade in sufficient volume to make good investments.
If you think the Japanese yen will continue to weaken, ProShares Ultra Short Yen (NYSE: YCS) is a good choice. Investors with margin accounts might also consider shorting CurrencyShares Japanese Yen Trust (NYSE: FXY). Equally, investors can buy the CurrencyShares Euro Trust (NYSE: FXE) or short the ProShares Ultra Short Euro (NYSE: EUO).
Another approach is to buy foreign shares that benefit from a weaker currency and short those that will be harmed by a stronger currency.
While the "race to the bottom" is making front-page news right now, there's a lot more to the currency war talk that's not being reported. Check out this analysis by Chief Investment Strategist Keith Fitz-Gerald on the looming 1930s-style currency war that's in the works.
Related Articles and News:
- Money Morning:
The Best Currencies to Invest in for 2013
- Money Morning:
Why a Rising Euro is Likely Despite Draghi Comments
- Business Insider:
Morgan Stanley Currency War Basket
Has China Quietly Joined the Currency War?
- Financial Times:
All's fair in love and currency wars