We've been watching the Japanese Yen's movement closely this year as it has gained strength against the U.S. Dollar in spite of the actions of the Bank of Japan and their explicit commitment to weakening their currency across global markets in order to prop up their export driven economy. We'll refer to our story from two weeks ago to provide the deeper history. In the meantime, we'll update a few data points that should continue to keep you watching for a dramatic turn in the Japanese Yen vs U.S. Dollar currency pair.
The commercial trader group just reached their second largest short position in the recent Commitment of Traders report. The only time they've been more bearish was late January of 2012. January of 2012 the market closed at 1.3206 or nearly 76 Yen per Dollar. By mid-March it had already fallen to 1.2043 or more than 83 Yen per Dollar.
Commercial traders have sold more than 160,000 futures contracts over the last quarter. Each contract is worth 12,500,000 Yen, approximately $112,000 Dollars or, nearly $18 Billion, in bets placed on a lower Yen going forward.
Our proprietary short-term momentum indicator is registering its highest reading since July of 2011....near the all-time highs.
The Yen is currently trading above its 120 week moving average for the first time since October of 2012.
These are some of the reasons why we expect the scenario we laid out two weeks ago to still be in play. We're watching closely for a sharp and lasting reversal from the Yen's recent move.
The Japanese Yen has rallied more than 6.5% since the their finance minister, Katayama Yano announced Japan’s shift to a negative interest rate in their latest battle to destroy their currency and create external demand thus allowing them to finally achieve their expressed desire of 2% inflation year over year. The Yen fell initially on this news but the ensuing rally has been a bit puzzling. Based on the Japanese government’s actions and intentions, we’ll chalk this up to, “Don’t fight the (Japanese) Fed” and look for selling opportunities inline with major technical resistance and their government’s intentions.
We noted in our upcoming piece for Modern Trader magazine that commercial traders had been anxious, aggressive sellers ahead of the Japan’s negative interest rate decision….almost as if they knew it was coming. The financial markets have always been old boys’ networks and Japan has always been an old boys network country. Therefore, it makes sense that the largest traders, holding the biggest positions would be forewarned in some manner of the Finance Minister’s actions if for no other reason than to mitigate the Minister’s effect on the welfare of their largest traders. Japan has never been shy about putting their interests ahead of anyone else. This would be a case of preserving local wealth at the expense of the rest of the world. Now that I’ve played my minor conspiracy card, let’s get to the action.
First, let’s take care of some quotation issues. Every currency can be quoted in terms of domestic currency per units of foreign reserve or, how much one unit foreign reserves will purchase in the domestic market. There are two key levels on the chart above. For the sake of round numbers, we’ll go with .8800 and .8000, this how the market is quoted by Tradestation. However, the real quote in this form is actually, .00088 and .0008. This is how much 1 Yen is worth in Dollars. Conversely, $1 is worth approximately 113.6 Yen per Dollar at .the high end of the range (.00088) and 125 Yen per Dollar on the low side (.0008). We expect the recent rally to be capped by commercial selling against the long-term moving averages now coming in at .8675 (115 Yen per$) and .8970 (111.5 Yen per $).
Moving to the commercial trader position will help illustrate the lack of faith in the current rally. Over the last three years, the net commercial trader position in the Japanese Yen futures has fluctuated between + 185k and +13k. However, since mid December, commercial traders have established their largest net short position since January of 2012 at – 54,000 contracts. When this is placed within the context of their recent actions, you can see that it has pushed the commercial traders’ momentum to its most negative level since August of 2007.
We expect the combination of commercial traders and the Bank of Japan to keep a lid on the Yen’s recent rally. Furthermore, we expect the central bank’s willingness to weaken the Yen at the expense of the Dollar and Yuan to continue whether we like it or, not. Therefore, we’re selling Japanese Yen at the first sign of a move lower. We’ll then place a protective buy stop above whatever the current swing high turns out to be. This could be one of those trades where the timing, the positions and the macro context all line up. If we’re anywhere near correct on this, we’ll revisit the trade as we near the lows at .0008 or, 125 Yen to the Dollar.
