Daily Gains Letter

Can Individual Investors Really Profit from Central Bank Paper Currency Printing?

By for Daily Gains Letter |


Since the financial crisis of 2009, central banks around the world—not just the Federal Reserve—have picked up a new way of revving up economic growth. This phenomenon is called “quantitative easing”—not a new concept, but it has gained a lot of attention in the financial world recently.

The idea behind quantitative easing is very simple. The central bank prints money and injects it into the economy through banks, governments, and other ways. The hope is that the money will eventually trickle down into the hands of consumers and businesses, so they can spend. From there, economic growth picks up; as consumers spend, businesses need to create more, eventually needing to hire more workers, and so on and so forth.

Does quantitative easing actually work? This depends on how you look at the economic conditions. For example, in the U.S., the Federal Reserve has been continuously implementing quantitative easing. The central bank has grown its balance sheet over $3.0 trillion, and as I write this, it is printing $85.0 billion a month and purchasing government bonds and mortgage-backed securities from the banks.

Those who favor quantitative easing say that it is working. They argue that unemployment is decreasing, businesses are hiring, and consumers are spending. On the other side, the opponents of quantitative easing argue that the quality of jobs isn’t there and consumers aren’t really spending on anything but basic needs.

Regardless of which side you’re on, quantitative easing has one effect, which can make investors money—the more money that’s printed, the lower the currency value goes. Consider the situation in Japan.

The Japanese economy, which exports a significant amount of goods into the global economy, has been experiencing an economic slowdown. The Bank of Japan, like the U.S. Federal Reserve, took on quantitative easing. As a result, their currency, the Japanese yen, fell in value. Take a look at the chart below of the Japanese Yen index, comparing the performance of the currency to other major currencies in the global economy.

Chart courtesy of www.StockCharts.com

Since September of 2012, the Japanese yen has depreciated significantly. The index was hovering around 130 then; now it stands just above 101—a decline of more than 22%.

To profit from a situation like this, investors could buy exchange-traded funds (ETFs) that specialize in a specific currency, like the ProShares UltraShort Yen (NYSEArca/YCS). Take a look at the stock chart for this ETF below:

dl_04162013_graph2Chart courtesy of www.StockCharts.com

If investors bought this ETF when the Bank of Japan revved up its quantitative easing, their profits, to say the very least, could have been significant.

What still holds true is that the Bank of Japan hasn’t stopped printing money through quantitative easing. On April 4, the central bank announced its most aggressive step. The Bank of Japan plans to print $1.4 trillion to take the country out of its economic misery. (Source: Khara, L. and White, S., “BOJ to pump $1.4 trillion into economy in unprecedented stimulus,” Reuters, April 4, 2013.)

Central banks from the U.S. and Japan are not the only ones printing money to stimulate the economy. The Bank of England is taking the same measures, implementing quantitative easing.

With all this said, investors must realize that this can all turn against them very quickly. One announcement from a country’s central bank can sometimes change the fate of a currency. So, you need to be careful, place in stops, and manage your trades if you chose to profit from quantitative easing by central banks.

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