The Washington put: Buy the yen

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The risk-reward is aligned for buying the yen (selling USD/JPY for instance) on the chance of a Washington clusterf***.

It’s very difficult to handicap a political crisis. The men and women of Congress are professional liars and what they say has little bearing on what they do.

What’s different this time is that we have some new tactics and players. Ted Cruz’s grandstanding is the symptom of a Tea Party power grab and House Republican leader John Boehner might have to do something drastic to keep control of his party.

It’s a sad state of affairs when people are seriously contemplating that John Boehner shut down the government (causing real pain for government workers and the economy) so he can keep his personal Congressional power. Overall, the Republicans are rudderless at the moment.

For the Democrats, this is Jack Lew’s first go-round. So far he is driving a hard line on the debt ceiling, saying there will be no negotiations. If that dam breaks, everything is on the table.

The other factor is Obamacare. Tea Party Republicans hate it like rabid dogs but the guy it’s named after can veto anything. It’s a political trainwreck.

The trade here:

  • Buy the yen on the chance of disaster. If the govt is shutdown for an extended period or the debt ceiling gets perilously close, the stock market will throw a fit and yen crosses will roll over.

The odds are against disaster but the payoff is big if it hits. I don’t think you have to rush into it but watch the news closely on the weekend and be ready at the Tokyo open.

My favorite way to play it would be a CAD/JPY short. There is a double-top for July and Sept and the 55-dma is about to break. If Washington goes sour, this pair could be at 92.50 in a hurry.

CADJPY daily chart w 55dma

CADJPY daily chart w 55dma

Author: Adam Button

Adam Button is the managing editor of ForexLiveâ„¢. He was previously the chief currency strategist at XForex and has also worked with Intermarket Strategy. Adam believes there's an edge in knowing every tidbit of news. He was formerly the head of the markets team at the Canadian Economic Press and is a graduate of Ryerson University. Adam lives in Montreal, follow him on Twitter: @FX_Button.

6 Comments

  1. Hi Adam,
    what you think the short of CHF/JPY……highest since till now see the chart once

  2. That’s a funny trade, I’d rather just go short EUR/JPY

  3. and the audjpy? im very nervous carrying my shorts over the weekend.

  4. One thing to consider. If you go are holding long yen trades. Your stops if a debt deal is stricken, could be jumped, if the market gaps. If you’re short usd/jpy and have lets say a 50 pip s/l set, and the market gaps 100 pips Sunday your s/l won’t get hit.

  5. i took some profits off and hedged the rest. opened an opposite position.so no matter what i have my total profits uptil now minus rollover and pip charges. i assume whatever gap opens itl probably close. there really isnt any perfect way to play this

  6. Ya that’s not really a put, but more of a risk event exposure. Put implies premium and optinality type payoffs, whereas long yen can leave you broke in no time.

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