Investors across the globe have been closely monitoring the Syria issue and the likelihood of a military attack by Western powers.
The U.S. President Barack Obama and other Western powers were mulling over a military action to punish the Syrian regime’s use of chemical weapons on civilians, while Russia promised to support the Middle East nation (read: Defense ETFs to Watch as Syrian Worries Build). This fear heightened instability in the Middle East and has largely impacted U.S. stock prices as of late.
However, recent reports indicate less chances of the U.S.-led military action, encouraging investors to recycle their exposure from safe haven to high-yielding securities.
As Syria President Bashar al-Assad accepted Russia’s proposal to give up its chemical weapons under international control, Obama immediately put the strike on hold asking Congress to postpone their votes for the time being. However, Obama also urged the U.S. military to be prepared for attacks if needed, so this crisis may not be over yet.
While the entire situation remains unclear at present, the Western involvement in Syria’s civil war seems to have taken a back seat, reducing the risk of wider conflict and in turn, dulling the demand for the traditional safe haven currencies like Japanese Yen. The currency fell to a multi-week low against both U.S. dollar and Euro (see more in the Zacks ETF Center).
Last week, encouraging Chinese retail sales and industrial output data added to the bearish sentiments for the safe haven currency. Further, the fall in the currency was supported by Tokyo's successful bid to host the 2020 Olympics and higher-than-expected Japanese growth in the second quarter (read: Japan ETFs Surging, Is the Country Back on Track?).
Winning the Olympics bid will no doubt inject optimism into the Japanese economy and its stocks, but has already taken a toll on the Japanese yen. Since the past few months, Japanese stocks and currency have been moving in the opposite direction.
According to the Tokyo bid committee, hosting the Olympics would beef up the economy by about 2.96 trillion yen ($30 billion) over the next seven years, but would continue to put pressure on its currency.
Moreover, the currency continues to soften on the growing prospect of the Fed curtailing its stimulus anytime soon as U.S. economy growth continues to pick up at a faster pace.
The chain of news and the slump in yen has made trading difficult for Japanese currency ETFs over the past ten trading days (see: all the Currency ETFs here).
The CurrencyShares Japanese Yen Trust (FXY) lost more than 1.53% over the past ten trading sessions and is down nearly 10% in the year-to-date time frame. The fund tracks the movement of the yen relative to the U.S. dollar, net of the Trust expenses, which are expected to be paid from the interest earned on the deposited Japanese yen.
The product charges 40 bps a year in fees. Additionally, the ETF sees a good volume of more than 555,000 shares per day and accumulated $118 million in its asset base.
The other product – iPath JPY/USD Exchange Rate ETN (JYN) – was down as well in the last ten days and has lost double digits in the YTD frame. The note provides exposure to the Japanese yen/U.S. dollar (JPY/USD) exchange rate. This means that when the Japanese yen appreciates relative to the U.S. dollar, the JPY/USD exchange rate increases and the value of the ETN increases and vice-versa (read: Japanese Yen ETF Investing 101).
The product is unpopular with AUM of $1.8 million and average daily volume of just under 1,000 shares. The ETN charges investors 40 bps in fees per year.
Obama’s postponement could prevent a broader war in Syria, dodging the wider prospect of attack on neighboring nations. However, the easing of the Syria conflict not only has a negative impact on sectors like oil and gold, it also puts pressure on safe havens currencies (read: Safe Haven ETFs Slide as Syrian Tensions Cool).
We expect these two safe haven currency ETFs to continue struggling in the days ahead because of the Olympics fever and chances of Syria avoiding a Western-led war. Both the products have a Zacks ETF Rank of 4 or ‘Sell’ rating, suggesting the pain to largely continue to close out the year as well.
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- Barack Obama
- Japanese Yen