Tuesday’s ETF To Watch: CurrencyShares Japanese Yen Trust (FXY)

by on December 21, 2010 | ETFs Mentioned:

Global markets got off to a quiet start on Monday, as equities struggled to move much in either direction to start the week. This flat session came as the dollar appreciating slightly as European debt fears persisted while tensions in Korea pushed investors back into the beaten down yellow metal, sending gold prices marginally higher on the day. Looking ahead, this week is filled with key economic announcements including GDP figures, the all-important jobs report, existing home sales, and durable good orders before the trading week is shortened as markets close for Friday trading in observance of Christmas.

Another key development in the industrialized world will come out of Asia today as one of the world’s most important central banks has its policy meeting. The Bank of Japan Policy Board, which meets once a month to discuss economic developments, is scheduled to release its decision regarding adjustments to the interest rate and other monetary tools. The current benchmark interest rate in Japan is 0.1%, and the Bank’s Policy Board has kept the rate unchanged since the beginning of 2009. Policymakers are expected to continue current efforts to stimulate the Japanese economy, and the analyst consensus for today’s announcement is for rates to remain unchanged at 0.1%, in an effort to spur the economy back to growth [see all the ETFs in the Currency ETFdb Category].

More important than the rate decision itself is the commentary that the board will make regarding domestic and international economic conditions. Traders and investors alike will surely pay close attention to board’s outlook for Japan’s economy as well as any additional insights about the global economic recovery as a whole. This is especially important in the case of Japan, since the nation has struggled to return to any meaningful growth levels and is currently engaged in a protracted battle to avoid falling back into a deflationary trap. If the bank signals more stimulus it could have a huge impact on both the Japanese economy and the yen, a currency which has been steadily appreciating for most of 2010, despite the best efforts by the BoJ to cap the currency’s rise [consider reading Three ETFs To Watch During The Great Currency War Of 2010]

Thanks to this important policy meeting by one of the world’s largest economies, the Rydex CurrencyShares Japanese Yen Trust ETF (FXY) is today’s ETF to watch. This fund tracks the Japanese Yen Index which tracks the U.S. dollar/Japanese yen exchange rate. FXY has risen a little over 10% year to date, and it will be interesting to see how the yen will perform relative to the U.S. dollar going into 2011, given that the greenback has been slowly regaining lost ground while the yen will surely fight to stay on track and continue rising [see FXY Fundamentals]. FXY is also optionable, which greatly increases the strategies available to seasoned investors by giving them the ability to take on longer term directional bets, as well as giving them multiple ways to hedge their current (or planned) positions in the Japanese economy [see all the ETFs tracking Japanese equities here].

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Disclosure: No positions at time of writing.