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Will Ford Fall? Toyota Surge? Protect Your Portfolio With This Tool

By , Quantitative Strategist  and  Renee Mu
28 March 2013 12:00 GMT

Do you own these stocks? Protect your Portfolio

Trade Idea: Long US Dollar/Japanese Yen (USD/JPY) with http://www.fxcm.com/

Why is Ford Motor Company falling, and why is Toyota Motor Corporation surging? We take a look at a key factor that may continue to haunt Ford’s stock price in 2013.

Ford’s stock price has fallen by as much as 10+ percent from recent multi-year peaks, but Toyota’s stock price has moved exactly in the opposite direction and trades over 20 percent higher through the same stretch.

Ford (F) Stock Has Declined While Toyota (TM) has Surged

ford_and_toyota_stock_and_the_japanese_yen_body_Picture_5.png, Will Ford Fall? Toyota Surge? Protect Your Portfolio With This Tool

The key disconnect doesn’t seem to be mere coincidence: it coincides with a substantial move in the US Dollar exchange rate versus the Japanese Yen.

The link between the US Dollar/Japanese Yen exchange rate and Ford stock has gone through several stages in recent years, and understanding the difference helps explain why the Yen is now relevant to Ford.

Stage One:The Financial Crisis was the Top Mover for Ford and the Yen

From the beginning of 2007 to the end of 2008, Ford stock’s price dropped by 64.2 percent and the US Dollar depreciated by 19.8 percent against its Japanese counterpart. The financial crisis has a particularly negative effect on any industries linked to the highly-indebted US consumer, and Ford stock fell sharply as a result. The Japanese Yen similarly benefited against the Greenback for comparable reasons.

ford_and_toyota_stock_and_the_japanese_yen_body_Picture_6.png, Will Ford Fall? Toyota Surge? Protect Your Portfolio With This Tool

Stage Two: Ford Stock Tumbles and US Dollar Falls Sharply versus Japanese Yen from 2007-2012

We then saw a significant reversal in Ford stock as the S&P 500 rebounded and the US economy recovered. All the while, controversial Quantitative Easing policies by the Federal Reserve meant that the US Dollar weakened against the highly interest rate-sensitive Japanese Yen.

ford_and_toyota_stock_and_the_japanese_yen_body_Picture_7.png, Will Ford Fall? Toyota Surge? Protect Your Portfolio With This Tool

Stage Three: US Dollar Strengthens versus Japanese Yen, and Ford’s Stock Price Falls

Ford stock moved higher alongside a resurgent S&P 500 as record-low interest rates fueled investments and boosted consumer spending. All the while, a resurgent US currency moved to fresh multi-year peaks against the Japanese Yen. Both Ford and the USDJPY moved consistently higher until the Yen broke the key ¥90 mark against the US Dollar.

ford_and_toyota_stock_and_the_japanese_yen_body_Picture_8.png, Will Ford Fall? Toyota Surge? Protect Your Portfolio With This Tool

Why was the break above ¥90 in the USDJPY significant?

Ford competes with auto manufacturers across the world, and impressive US Dollar strength against the Japanese Yen makes its cars more expensive in Japan. A cheaper Yen means that Japanese cars become less expensive in the US. The double-whammy is enough to boost the stock price of the Toyota Motor Corporation and simultaneously sink Ford stock.

ford_and_toyota_stock_and_the_japanese_yen_body_Picture_9.png, Will Ford Fall? Toyota Surge? Protect Your Portfolio With This Tool

According to Ford’s financial reporting for Q4, 2012, the pre-tax profit of Ford Motor in the Asia-Pacific segment fell to a paltry $39 million—its North American profits were nearly 50 times that amount.

But recent price action emphasizes that investors fear that further Japanese Yen depreciation (USDJPY gains) could cut into Ford’s profits as Japanese auto manufacturers gain traction.

Toyota’s stock is up over 20 percent year-to-date, while Ford is only up 2 percent.

How do we Protect Against the Key Risk to Ford Stock?

The way to protect against the exchange rate risk to Ford stock seems relatively simple: sell the Japanese Yen against the resurgent US Dollar. Using a currency trading platform, this is as simple as going long the USDJPY currency pair.

Past performance is not indicative of future results, but Ford stock saw an 11.4 percent decline in the same time that the USDJPY strengthened by 4.5 percent—implying that a 1 percent gain in the USDJPY could affect Ford by as much as 2.5 percent.

Ford’s stock may not follow the USDJPY on a tick-for-tick basis, but we do believe the Japanese Yen can have a significant impact on Ford and Toyota stock through the foreseeable future.

--- Written by David Rodriguez, Quantitative Strategist and Renee Mu, DailyFX Research Team

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28 March 2013 12:00 GMT