The dollar is one of the top performing major currencies in the world this year. The reverse is true for the Japanese yen, which has fallen more than 9% against the greenback since the start of the year.
Some market observers believe this scenario will last until 2022, and if so, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) could be a star among exchange traded funds in Japan.
As it stands, DXJ is doing its job and profiting from the weakness of the yen against the dollar. The WisdomTree ETF is up 10% year-to-date while the MSCI Japan Unhedged Index is down almost 2%, indicating that if investors want exposure to Japanese equities in a weak yen climate, currency hedging is a relevant consideration.
The likelihood that the Federal Reserve will raise interest rates, which could push the dollar higher, further paves the way for the yen to weaken in 2022. Conversely, the Bank of Japan is not dealing with the inflation and rate hikes in the world’s third-largest economy are not on the agenda.
“Now think about the calculation of Haruhiko Kuroda, head of the Bank of Japan (BoJ). Inflation is far from hot on the streets of Tokyo; the consumer is lethargic, ”says Jeff Weniger, head of equity strategy at WisdomTree. “A 2022 rate hike by the BoJ is about as likely as you and I would go to astronomers and successfully lobby for the Pluto decision to be overturned.”
The fact that the yen is already incorporating the Fed’s rate hikes, meaning it is already collapsing against the dollar, adds to the case for DXJ in the near term. This could equal a DXJ buying opportunity ahead of the New Year.
“The yen doesn’t wait for the US monetary authorities to surprise the market with something more than a rate hike or two next year. It is weakening right now, breaking above the 112 level a few weeks ago and is currently trading around 115. Maybe the yen is telling us that the Fed might be forced to do something like an increase in every meeting or every other meeting, ”Weniger adds.
Investors looking for a small cap on the weak yen might consider the WisdomTree Japan Hedged SmallCap Equity Fund (DXJS), the small-cap cousin of DXJ.
“If you expect the Yen chart to continue to rise as the Japanese currency weakens, our two ETFs that hedge it are the WisdomTree Japan Hedged Equity Fund (DXJ) and the WisdomTree Japan Hedged SmallCap Equity Fund (DXJS)” , concludes Weniger.
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The opinions and forecasts expressed herein are solely those of Tom Lydon and may not come to fruition. The information on this site should not be used or interpreted as an offer to sell, a solicitation of an offer to buy or a recommendation for any product.