How to Trade the G-7's Yen Intervention

Dollars and Yen
Robert Clare | Photographer's Choice | Getty Images
Dollars and Yen

So the G-7 has intervened to halt the yen's rise, and thus far the action is having some effect. But will the yen continue to weaken, or will the effects of the intervention wear off? And how can you trade on the G-7's action?

Andrew Busch, global currency and public-policy strategist, BMO Capital Markets, recommends that investors "go with the central banks" and expect that the yen will weaken further. Speaking on "Money In Motion," Busch noted that the G-7's intervention was substantial—about $25 billion, he estimated—"hopefully consistent," and in line with the fundamental outlook for the currency. So he recommends buying the dollar at 81 and selling the yen, setting a stop at the old resistance level of 79.75, and looking for the yen to weaken to 85.75.

Rebecca Patterson, global head of currencies and commodities for JPMorgan's private bank, also expects the G-7 to eventually prevail. "No one can afford for Japan to pull down the global economy," she said. "It's in everyone's interest to get Japan back." But Patterson pointed out that when the G-7 intervened to prop up the euro in 2000, the process was not immediate—and the same could hold true with Japan.

Or maybe not. Todd Gordon, co-head of research and trading at Aspen Trading Group and a technical-analysis expert, looked at the yen's trading range against the dollar over the last six months and noted that the yen did not move much past 81 despite the central banks' action. "The fact that this is holding its resistance tells me that we might have another go back towards the sub-80 level," he said. "Don't say dollar-yen is out of the woods just yet."

Joe Lavorgna, chief economist for Deutsche Bank, also thinks the yen could strengthen despite the intervention. He noted that his firm is revising its short-term GDP forecast for Japan downward from about 1.6%, but expecting a pop later in the year as the rebuilding effort gets underway. Central bank action, he said, "works when the fundamentals support it. Therefore, one may call into question how successful it is, because the fundamentals do support perhaps a stronger yen—especially if you do get repatriation at some point."

Make up your own mind, and watch the discussion, here.