As we prepare for another potential rate hike from the Federal Reserve in December, we are also looking ahead into 2023 and possible future trades. We have been researching the currency market for a potential profitable play. The Euro is in a quagmire given the energy situation and the Ukraine-Russia conflict. The British Pound has been pounded into oblivion and their prospects aren’t good after Brexit. The key remaining currency is the Japanese Yen.
We created this chart comparing Fed hikes to EWJ:
Whenever the Fed raises rates, the Yen currency depreciates against the US Dollar as can be seen from the pattern from 2006 thru 2022. At some point, we expect the Fed to pause and eventually pivot to a more accommodating policy which in turn will mean EWJ will rise again.
We have already entered into a small position in EWJ by selling covered calls on the ETF. We expect EWJ to go down so we sold calls against our holdings and hope they expire worthless. We will add more positions in EWJ after December and do so through naked puts, ideally when EWJ has a major down day to maximize the premium capture.
Our views may change however, if inflation is still raging and the Fed announces that it will need to continue to hike aggressively beyond December into 2023. If the Fed continues to hike into 2023 then it is quite possible markets will react very negatively and we don’t want to be left holding the proverbial bag.
While we wait to see what happens, stay tuned and stay solvent…