Why USD/JPY Could Continue to Fall
January 27, 2010
Last Friday, the CFTC released their weekly report of futures positioning. According to the data, which was as of last Tuesday, short positions in the Japanese Yen hit the highest levels since August 2008. At that time, the Yen weakened significantly and soon after a short squeeze pushed the currency sharply higher against the U.S. dollar.
The following chart illustrates the strong relationship between Yen positions and the JPY/USD (the inverse of USD/JPY). Right now the Yen is rising against the dollar despite the fact that traders are substantially short Japanese Yen. This means that should the Yen continue to rise, or in other words USD/JPY continues to fall, there could be an aggressive short squeeze that triggers a big move higher in the Yen and a sharp breakdown in USD/JPY.
A further rally in the Yen will undoubtedly test the resolve of Japan’s Ministry of Finance and at some point, maybe below 87, the Japanese government may feel compelled to step in and vocally criticize foreign exchange fluctuations but until then, the odds are skewed towards further losses in USD/JPY.
Posted in Intervention, Japanese Yen, forex blog
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January 28th, 2010 at 9:59 am
Very nice chart.
Actually, there are more traders going short then long yen. Kathy, why they r so stupid to risk all the money they own ?
IMM net yen position is in trading range (white line) and could turn up, but I don’t see much potential for yen to go up.
Is this IMM net yen a leading indicator for yen, if not please show the better one.
January 28th, 2010 at 10:41 am
Because the Yen is a cheap funding currency and they are bigger believers of the recovery trade than the slowdown trade.
Yes the IMM can be a leading indicator for the Yen
January 29th, 2010 at 5:33 am
I don’t understand. If more positions are selling Yen, how can the value of Yen (JPY/USD) go up at the same time?
January 29th, 2010 at 11:00 am
These are future traders which is a smaller subset but is a reflection of speculative demand. The FX market is huge and “other” investors, corporations, hedgers etc are “buying yen”
January 29th, 2010 at 8:23 pm
Japanese Finance Minister Naoto Kan reiterated his call on the central bank to support an economy under threat from falling prices and a strengthening yen.
“We’ll work together with the Bank of Japan to take a comprehensive and powerful approach to overcome deflation,” Kan said in a speech in Tokyo today as parliament began deliberations on the government’s 92.3 trillion yen ($1 trillion) budget for the year starting April 1.
Since taking office on Jan. 7, the finance chief has said Bank of Japan Governor Masaaki Shirakawa can do more to buoy the world’s second-largest economy. The government’s options for more stimulus spending are limited after Standard and Poor’s cut the nation’s sovereign rating outlook this week.
“We expect the central bank to support the economy through appropriate and flexible monetary policy while maintaining close ties and exchanging information with the government,” said Kan, who is also deputy leader and economy minister.