The yen is going to continue to skyrocket, and that could mean more in the stock market — according to one trader.
"A strengthening yen signifies risk aversion ... generally when you see the yen strengthen that indicates that global equities are rolling over or about to roll over," Todd Gordon said in a recent CNBC "Trading Nation" interview. The Japanese currency has been on a tear of late, hitting a 17-month high versus the dollar on Monday. The yen and equities have an inverse trading relationship, when the currency rises, it usually corresponds with a dip in stocks.
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By Gordon's work, this risk-off environment should continue over the course of the coming months. Looking at a chart of the FXY, the ETF that tracks the yen, Gordon noted that the currency is in an "explosive" uptrend. "I want to put on a trade in the yen that would hedge and long positions on the market that you have," said the founder of TradingAnalysis.com and a CNBC contributor.
So in order to hedge against a decline in U.S. equities, Gordon made a bullish bet on the FXY, the ETF that tracks the yen. Specifically, Gordon purchased the FXY May 88/92 call spread for $1.60. The goal is for the ETF to rise to that strike that Gordon sold short — or in this case, $92 in the next month. That's another 3 percent move from where the ETF is currently trading.
"This is a good trade if you want to hedge a longer-term portfolio or, if you are bearish on the market, this is a good way to express your bias," he added.
