Yen Weakens Despite Strong Economic Performance

The Japanese yen weakened against the U.S. dollar and the euro on Thursday, despite improvements in the Japanese economic performance. At the moment, the greenback added 0.02% to its value against the yen to trade around ¥78.79. At the same time, the euro climbed 0.35% higher to stand around ¥112.38. The yen failed to find support in better than expected economic results. In May, Japan's All Industry Activity Index rose 2% to beat analysts' expectations of a 1.7% rise. In April, the index posted a 1.4% increase. The index follows changes in production among different sectors of the Japanese economy and serves as a good proxy for the GDP movements. The latest results could be interpreted as a clear sign that the Japanese economy has turned the corner following the worst natural disaster in its recent history. The devastating earthquake/tsunami and the Fukushima disaster have caused energy shortages and supply disruptions, creating problems across sectors all over Japan. It seems Japan is slowly leaving the natural disaster troubles behind. June's trade balance provided even more powerful evidence that Japan's economic reality is getting back to normal. According to Japan's finance ministry, trade balance was back in black after three months in June as Japan posted a ¥70.7 billion surplus. Exports recovered strongly in June, rising 5.4% compared to a month earlier. However, on a yearly basis, exports fell 1.6%, still an improvement from a 4.1% fall in May. For decades, Japan's economy has been exports-driven. Few months of trade balance deficits were a direct consequence of energy shortages and supply disruptions caused by the natural disasters. It seems the worst is over for Japan's massive exports sector. The picture is not all rosy for the Japanese exporters, however, as debt problems in the Eurozone and the United States threaten to bring back the global economy back into recession, causing a massive dip in demand for Japan's products. The Eurozone leaders are meeting today to discuss the debt crisis in the Eurozone periphery. It is becoming painfully obvious that the way the European leaders have been handling the crisis is not producing expected results. Therefore, a dramatic shift in the approach to the crisis is needed. Unfortunately, there is little evidence that the Europeans can agree on a radical change in the way they are handling the crisis. In the United States, the two parties are still unable to frame a common position on how to eliminate the country's massive budget deficit. The Democrats are prepared to accept some deep cuts in the country's social spending, in return for raising taxes for the rich. However, the Republicans, who control the House of Representatives, do not want to hear a word of raising taxes, claiming it will only hurt job creation. If the debt ceiling is not raised soon, the U.S. government will be forced to shut down by August 2. However, President Obama wants to reach an agreement earlier to give time to the lawmakers to vote in the new deal. Time is running out for both the U.S. and the Eurozone. In the meantime, traders seem to be looking for shelter in precious metals. At the moment, gold is trading above the $1,600 mark once more, rising 0.22% to $1,603.85. Silver has passed an important $40 barrier as well, climbing 0.62% to stand around $40.27. ACTION ITEMS:

Bullish:
Traders who believe that the latest economic results indicate that the Japanese economy has successfully recovered from the earthquake/tsunami aftermath, providing a lot of tailwind for the yen, might want to consider the following trades:

• JPY/USD Exchange Rate ETN JYN is a long position on the yen. JYN should rise if the yen appreciates.

• ProShares Ultra Yen ETF YCL is another long play on the yen. However, YCL should rise more than JYN if the yen appreciates.

Bearish:
Traders who believe that the debt crisis drama in the Eurozone and the United States will not finish with a happy ending, which should hurt Japan's exporting sector may consider an alternate positions:

• ETFS Short Japanese Yen Long US Dollar ETC (Sterling) ETF (SJPP) is a short play on the yen. SJPP should rise if the yen depreciates.

• ProShares UltraShort Yen ETF YCS is another short play on the yen. However, YCS should rise more than SJPP if the yen depreciates.

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