💵 Making Sense of the Dollar and Yen

How to capitalize on the current macro environment

Japan’s Monetary Policy

The Bank of Japan has operated very differently than most other central banks that have been aggressively raising interest rates over the course of the past two years to curb inflation. Instead, the Bank of Japan has kept interest rates negative to fuel spending and further economic growth.

That policy is potentially coming to an end as the Bank of Japan has recently began acknowledging that it may need to begin raising interest rates.

However we have not gotten any strong statements signaling that they will shift economic policy just yet - this will be something to keep an eye on going forward.

What Does it Mean for US Stocks?

The Japanese Yen and US Dollar have shown a positive correlation with each other, meaning that as one goes up, the other typically does too, and vice versa.

The recent news of the Bank of Japan not committing to a shift in economic policy caused a significant drop in the US Dollar Index ($DXY).

The DXY dropping is correlated with a rise in equities. The chart below shows that as the DXY (blue) rises, the S&P 500 (orange) falls, and vice versa.

Trade Ideas

Because US monetary policy tightening is likely over and the chances of seeing rate cuts sooner rather than later is growing, there is an opportunity for outsized gains in stocks that benefit from lower interest rates.

Three sectors in particular stand out:

• REITs: lower interest rates bring increased cash flow and investment possibilities, raising equities in this space.

  • Stocks to watch: SLG, VNO

• Money lenders: lower interest rates allow lenders to borrow at lower rates and lend at higher rates.

  • Stocks to watch: AFRM, UPST

• Regional banks: these banks are also large lenders - so decreased interest rates means more potential for lending activity.

  • Stocks to watch: KRE, DPST

For more information on the Yen, USD, interest rates, and trading opportunities, watch the five minute clip below: