I've been betting on USDJPY rising for a few weeks now...basically since the earthquake... clearly it hasn't worked... Moreover, the inability to decisively bounce off 80 despite the prior BoJ intervention and persistent Japan negativity has even made me flip over to a short USD.JPY position (long JPY). Taking a loss is never easy when you become committed to some longer term macro view, and I rarely ever "stop and reverse" but I've seen the scenario play out numerous times over the years. It suddenly became clear to me that almost everyone is positioned the same way (yen shorts). Just as I had, I strongly suspect others are viewing the downside capped by prior (and future?) FX intervention, and that creates a confluence of sell stops that are just waiting to be triggered. Whilst Japan may intervene to prevent "excessive" fx volatility, I'm not sure they're really committed to defending a particular level such as 80 in USDJPY. I can only imagine at the extent of the sell stops in USD that have built up in 75-78 range. The longer stocks stay weak, the more pressure the JPY shorts will come under. In addition, JGB futures also look primed to burst up through 141.00 after trading in a really tight range in recent weeks, and typically when you get short covering in JGBs (often reflecting dumping of "Sell Japan" plays by foreigners) you often get corresponding short covering in JPY. When I checked out the Tokyo Financial Exchange retail fx positioning data and read that 88% are long USD.JPY I realized I had to fade that.
Maybe you should just avoid the pair. You seem to be getting chopped up. JPY is tough. All the conventional wisdom seems to be wrong.
Agree with the directional call, and it's not a comfortable view to hold at this level either with the intervention threat. Correlations with US front-end yields have been quite meaningful, domestic investor flows very recently also been supportive. Haven't looked at IMM positioning, though I don't place so much weight on that variable. Possible switch of safe-haven flows from CHF to JPY given increasing institutional bias to close out short EURCHF positions. Still not overvalued on most houses' valuation metrics. Macro picture is, overall, quite slanted towards long Yen. All of which, of course, will count for bugger all if Yukio Edano's mutterings last week are more than a little jawboning. The chances of getting towards 76 without intervention would seem to rest on it being an orderly descent.
If I had to write a chapter of my trading and interpretation of the yen since march yours would be it EXACTLY! The price action is so baffling and completely out of synch with my fundamental take that I have refrained from taking any positions for a while. After a pullback from 85 i expected the Yen to continue up and catch up with fundmentals. It just never materialized. My broker posts its traders positions as a group to use as a contrarian indicator. Like you said the majority are long. What I just cant wrap my head around is where the Yen strength coming from? Short of a few conspiracy theories I have no idea lol There economy is worse than US, interest rates are terminal, price is in an area that the BOJ has shown a willingness to act... I could go on and on yet the yen continues to find buyers???? I wont buy USD/YEN just because its shown a bulldogedness progression to sink... If any other pair I might say if you cant beat em join em ... BUT I dont want to get caught with my pants down should BOJ intervine.
The inverse of yen strength would be one place to look ... Digging deeper into and understanding some of the drivers mentioned briefly above would be another
I am not so worried about this, because MoF/BoJ already did this and it had only a temporary effect. Although people always assume Japan benefits from a weaker yen - and this might be true for Japan exporters - Japan is also hugely dependent on raw material imports. So whilst politicians might say one thing to domestic exporters, I'm not sure they are too worried about current yen levels. There are winners and losers. Of course Germany was a net exporter for many years and a stronger mark/Euro did not hurt them, because like Japan they were dependent on importing raw materials. In the past JPY did rally when risk aversion took place, with carry trades (eg.hedge funds short yen) forced to unwind, or domestics repatriating funds. I thought the Japan nuke disaster and huge BoJ money expansion might trumpt this normal behaviour. But price actions is telling us something else, I think.
I must admit that re-reading about how Tiger Management Hedge Fund got killed in 1998 when USDJPY dropped 14 handles in 1-2 days when they were massively short JPY also probably influenced my thinking. Not entirly rational this aspect of my thinking, and whether this relates to today's situation...possibly not...but I kept churning over the market events of recent weeks... Then when I thought harder about the retail fx positioning data everything seemed a lot clearer. Of course I might be wrong, but I'm clear that I want to be long JPY.
That's the main metric you're basing your trade decision on? Have you tested how explanatory Japanese retail traders' positioning has been for moves in the yen the past 1-2 years? In Mrs. Watanabe's heyday it was estimated their trading might constitute up to 30% of daily spot trading volume. Seems more of confirmatory or secondary piece of evidence for a trade to me ....
Confirmatory, yes. I'm not concerned at the % of total trades the Tokyo positioning data represents...it's more of a sample space for how I expect weaker hands to be positioned. It makes sense in the light of the price action, that's all.. I've been trading Japan since 97 so a lot of the time it's more intuition than anything else. Usually works, shorting yen since March was the exception.