What’s In Store for Our Favorite Crisis Currency Play?

Today's commentary is by Jack Crooks, editor of World Currency Options and new editor of The Money Trader.

Dear A-Letter Reader,

The yen dropped again in overnight forex trading early today on word that the carry trade is once again gaining momentum.

A wholesale resumption of yen selling to fund renewed appetites for riskier investments is just the latest reason why I see a pullback in the yen coming soon, after soaring since February.

Don't get me wrong, I still like the yen long-term. The yen can provide a key hedge in a world which consists of continuous intermittent bouts of unwinding leverage. But, I do think the Fed's recent actions during the Bear Stearns affair helped bring a modicum of confidence back to the credit markets.

I also think the Fed's steps were unusually well thought out - especially given the rather crazy credit-creation-driven monetary system we now live in. In short, is it time for the carry unwind to take a breather on some risk seeping from the system?

As you may remember, for years, investors and traders all over the world have borrowed Japanese yen to invest in higher-yielding assets (i.e. the popular "yen carry trade.").

But there's one problem. This yen carry trade only works as long as the markets steadily increase for a period of time. Once markets correct, yen carry trades "unwind," meaning traders must pay back the Japanese yen loans, and push the yen higher. That's exactly what's been happening lately.

The Last Time This Happened -
Savvy Investors Made 46.7%

Below is a chart of yen-dollar (not the usual dollar-yen you are used to seeing). This chart compares the yen's move the last time we saw a significant carry trade unwind. This particular carry-trade unwind happened 10 years ago, just after the Asian Financial Crisis. The crisis effectively unwound the carry trade and the yen surged 46.7% against the dollar.

We then looked at where the yen was before the unwinding carry trade began in 2007. This time, of course, the sub-prime credit crunch triggered the carry-trade unwind. Assuming the yen leaps as much as it did 10 years ago, i.e. 46.7%, then the yen-dollar pair could reach the 118.00 level. For now, it's resting right around 101.25.

Sure, it is a bit simplistic to say the yen will rise 46.7% against the dollar this time around. But when you consider the carry trade was about seven-times larger in 2007 than it was in 1998, it definitely seems possible. Also the credit crunch and unwinding of leverage is more pervasive than the Asian Financial Crisis. So I think it increases the probability this simple analysis could play out, and shoot the yen-dollar pair higher.

That said, another thing you may notice about the chart above - it's looking parabolic! How much longer can the yen march straight up against the dollar (and push the USD/JPY currency pair straight down) without taking a breather?

Below is a summary from the Commitment of Traders Report (CME Long Form) that shows the open interest in the Japanese yen for Non-Commercial speculators, like me:

Mr. Market's Law - Almost as Sinister as Murphy's Law

Now we all know how sinister and sadistic Mr. Market can act at times. You can tell because Mr. Market likes to wait for the maximum amount of players to commit to a certain trade before he delivers an ugly blow.

Open interest shows us how the majority of traders feel about a particular position. These numbers tells us how committed traders are to a particular position. The numbers also give us some insight on when Mr. Market is about to deliver a stiff backhand to the jaw of those traders who are a little too married to their position.

At 76% long, we may be inching ever so closer to backhand time. But be warned: the headlines won't read: "Mr. Market Slapped the Punters." Instead, we will see something such as: "Profit taking in the Yen."

And if we see "profit taking" in the yen, where might traders move those profits over the near-term? Maybe into a commodity currency with yield and growth - two things valued in a world if credit isn't frozen solid.

Where the Yen Profits Will Flow Perhaps?

Above is a cross-rate chart of Australian dollar compared to the Japanese yen. It shows the Aussie peaked at around 108 against the yen back in October 2007. The Aussie has been losing ground against the Japanese yen ever since. It's now trading near 91.

Maybe it's a decent risk/reward setup. Key word that is, as usual, "maybe."

JACK CROOKS, Editor
World Currency Options

EDITOR'S NOTE: Are we in for more market risks this year? Our investment editors, Mike Burnick and Eric Roseman certainly think so. If so, carry traders will be knocked out of the park once again. But those that take advantage of this next yen correction will be in the perfect position to profit from this latest round of carry trades - as they come undone later this year. Read our NEW special report right now to find out how you can be one of these savvy investors.

Last Week's Rally was Nice While it Lasted...
but Big Ben Has Other Plans for the Dollar

Ben Bernanke is just DAYS away from unwinding the world's biggest bet - and his actions could spin markets into a "deflationary, global collapse."

To learn his dirty little secret - and grab potential gains of 319% or MORE,
Read Jack Crooks' latest report.

Thinking about Moving to Panama?
Go Sooner Rather Than Later

Panama may have a new immigration law coming soon...and this new law could make it more difficult to pick up and move there.

The Legislative Assembly of the Republic of Panama enacted the new immigration law, which seeks to modernize the rules applying to programs governing passports, visas and residences for foreigners.

I talked with several of my contacts on the ground in Panama. According to them, the law is designed to protect and tighten Panama's all too porous borders and control the entrance of undesirables.

In Panama, they have an interesting process to adopting new laws. First, general laws are enacted setting out the guidelines on a topic. Then, the executive branch fills out the intent with proposed rules. The Legislative Assembly can then review those rules.

With this process in place, it's likely that the final form of this new law and its rules will not be known before September 2008, possibly later.

In the meantime, the existing laws remain in place. But if you are considering establishing a residence in Panama, you should act immediately because some of the existing laws are more advantageous than those likely to replace them later this year. (For an extensive review of the existing laws, see my report, Panama Money Secrets.)

Panama has many attractions for foreigners. For many years, there has been a broad official outreach program with special laws that make it not only easy, but profitable for foreigners to make the Isthmus their new home or second home.

Panama deliberately has positioned itself as a first-class retirement haven, with the most appealing programs of special benefits for foreign residents and retirees you'll find anywhere in the world. Currently it also offers a variety of other visas for investors, persons of high net worth, wealthy retirees, small business and agricultural business entrepreneurs, and those who simply want to immigrate and become Panamanian citizens.

Unfortunately, the new law wants to modify, update and in some cases repeal these existing visa programs. The new law does not make any retroactive changes to visas already granted, but professionals we work with in Panama see the new law as more restrictive than the current law it will replace. (If you need legal advice in Panama, we can recommend reliable professionals for Sovereign Society members.)

For a full list of the updated changes, please see my blog right now.

BOB BAUMAN, Legal Counsel

P.S. This May, I'll be down in Panama once again, for our annual Total Wealth Symposium. Over four days, I'll be joined by investment and asset protection experts from around the world who will give you their most up-to-the-moment ideas about how to protect and grow your wealth during these dire market times. Also, I'll be hosting our first ever "Boot Camp" on second passports, dual citizenship and residence offshore, as a bonus session at this year's Symposium. Click here for the full details.

This Shipping News is Bad for Trade…

Global shipping, both sea and land, are now entering a major slowdown as the U.S. economy contracts this quarter.

Major barometers of shipping activity continue to slow this year - and not just in the United States.

The Baltic Exchange Dry Index is a global composite of lease rates charged by the world's leading shipping companies to move dry bulk goods. And right now, this index is declining - big time. It's down more than 30% from its high last fall. The data suggests shipping companies' earnings have peaked following a boom from 2003 until mid-2007.

Although the United States continues to benefit from a cheap dollar and boosting exports, imports are declining. With sky-high energy costs, shipping companies are consolidating their schedules to reduce costs. You can tell because container volume continues to decline. Fuel costs, more than any other variable, continues to eat away at margins.

And it's not just container shipping companies feeling the pinch...

Federal Express (FDX) reported its third straight decline in profit last week. That's because of growing slowdown in freight volume and surging fuel costs. The freight-volume boom ended more than a year ago, and shipping has continued to slow along with the economy for months.

Along with United Parcel Services (UPS), FedEx's main rival, diversified transportation companies handle more than 22 million packages per day. The only good news for transport companies is the acceleration in trans-Pacific trade where both operators continue to bolster sales at the expense of slower traffic in the United States.

The trucking business has been especially hit hard as skyrocketing diesel fuel continues to break into margins. As a result, railroads have benefited as companies shift transportation modes from trucking to rail in order to reduce costs.

Asian growth will probably continue to keep earnings from falling off a cliff. However, it's fair to assume that the bull market in shipping stocks has ended since last fall.

The weight of a U.S. slowdown combined with soaring energy prices is slamming the industry. Only the rails are making any inroads in a tough 2008.

ERIC ROSEMAN, Investment Director

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