Yen Starts to Recover as Debt Fears in the U.S. and Eurozone Persist

The Japanese yen started to recover on Friday, following Thursday's sell-off in the wake of the Bank of Japan's intervention, as debt fears in the United States and the Eurozone persist. Presently, the U.S. dollar lost 0.35% of its value against the yen to stand around ¥78.62. At the same time, the euro is trading around ¥111.03, or 0.17% below its previous close. On Thursday, the Bank of Japan interfered in the markets in order to bring down the value of the yen. Even though it did have initial success, the yen seems to be on the rise once more. The fact of the matter is that the central bank's intervention did not change the underlying reason behind the rising yen, and that is the continuation of debt problems in the Eurozone and the U.S. As mounting debt puts pressure on the world's largest economic blocks, traders are seeking shelter in the Swiss franc, the yen and gold. On Wednesday, the Swiss central bank took markets by surprise by cutting its interest rates to near zero in order to weaken the franc. On Thursday, the Bank of Japan made its move. Both Switzerland and Japan are export-led economies, so strong currencies are a threat to their economy, as strong currency makes exporters less competitive in the global markets. Therefore, the latest interventions by the two major central banks can be seen as an attempt to help domestic producers. The move is especially important for Japan, since its economy is still in the process of recovery from the devastating twin natural disasters. Just how fragile the economic recovery in Japan is can be illustrated by Friday's Leading Indicators Index data. In June, Japan's Leading Indicators Index improved from May, but fell below analysts' expectation. The June reading was 103.2, compared to 99.4 recorded in May, and 103.4 expected by most analysts. The index is formed by combining 12 indicators ranging from machinery orders to stock prices, and is a good approximation of the health of the overall economy. Like Japan, Australia is trying to recover from natural disasters, namely the Queensland floods. Like in Japan, the recovery is not necessary going according to the government's plans. On Friday, the Reserve Bank of Australia, the nation's central bank, has lowered its growth projections. According to its latest estimates, Australia's economy should grow 3.25% this year, down from its previous estimate of 4.25%. The central bank stated that the economy will suffer due to weak domestic demand. A good indication of how slow the Australian recovery is can be found in the construction data. In July, Australia's AIG Construction Index rose to 36.10, from 35.8 in June. The index represents an amount spent by builders on both private and public projects. Even though the July figure is an improvement, the sector is still contracting, since any reading below 50 indicates contraction. ACTION ITEMS:

Bullish:
Traders who believe that the economies of Japan and Australia will continue to recover from the negative effects of natural disasters might want to consider the following trades:

• CurrencyShares Japanese Yen Trust ETF FXY is a long play on the yen. FXY may rise if the yen appreciates.

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

• CurrencyShares Australian Dollar Trust ETF FXA is a long play on the franc. FXA may rise if the franc appreciates.

Bearish:
Traders who believe that there are a lot of obstacles for Japan and Australia on their way to full recovery, and one of them is an overvalued currency, may consider an alternate positions:

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

• ETFS Short Australian Dollar Long US Dollar ETC ETF (SAD) is a short play on the franc. SAD may rise if the franc depreciates.

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