Is It Too Late to Join the 'Short Yen' Party?

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In trading terms, there’s nothing worse than being late to a party. For whatever reason, you have held back as a trend develops, and then watched as seemingly everybody else made money. Eventually, you can’t stand it any longer and, in a belief that this move will never end, buy in. If you have ever done this, then I’m sure you know how this story ends…you always hit the top.

Actually, you probably don’t; I’m sure there are times when whatever it is does keep going, but those are easy to forget. When it does go badly, however, it can lead to disaster. Annoyed at yourself for missing out in the first place, then doubly annoyed that you bought in at the top, you are likely to make some bad decisions. Cutting for a small loss is no longer an option… you feel compelled to somehow turn this into a profit and ill advised averaging, shorting at the bottom of a correction and a whole host of horrors ensues. I should know, I’ve been there myself and have watched this very phenomenon destroy too many promising careers in Foreign Exchange dealing rooms.

If you are active in FX and have missed out on the recent Yen short, then resist the temptation to join in now or you could suffer the same fate. Since the end of October, Dollar Yen (USD/JPY) has been on a tear as the Yen’s weakness has dominated.

chart1

This has been particularly remarkable when you consider that a large part of the move has come about despite a general weakness in the US Dollar. This chart from FXstreet.com shows the comparative performance of USD/JPY (solid orange line) and the US Dollar Index (red and green bars). It would be reasonable to expect some correlation as a rising USD/JPY represents Dollar strength relative to the Yen, but as you can see, that hasn’t been the case.

Since the beginning of November, the Yen has been collapsing, even against a weak Dollar.

Given that, the correction of the last couple of days as USD/JPY has retreated from highs close to 104 (see Fig. 1) could easily look like a good entry opportunity to somebody who has been on the sidelines. It is easy to convince yourself that Yen weakness is set to continue as the Japanese Government continues to actively pursue inflation through "Abenomics," and, given the evidence of Fig.2, you could also make a case that a turnaround in the Dollar is likely soon should the Yen just hold steady.

As I said, though, there is rarely any good that comes from arriving late at a party, and this particular one looks pretty crowded right now. Recent CFTC data states that speculative short positions in Yen futures account for around 205,000 contracts, compared to about 33,000 longs.

The sheer size of forex means that futures positioning doesn’t move the cash market in and of itself, but those numbers give a pretty good idea of overall market positioning.

Looking directly at the cash spot market doesn’t paint any prettier a picture. The last time USD/JPY traded above 103 was in May of this year. By mid-June it had dropped to below 95. This hardly inspires confidence in a long position at these levels.

Of course, it could be that, if the Fed announces a significant reduction in QE this week as Japan presses ahead with Abenomics, USD/JPY will resume its upward trajectory. Regular readers (if there is such a thing) will, however, know that my trading room experience has taught me that, in the short term at least, market dynamics and positioning can trump even the most basic fundamental outlook. In the case of USD/JPY, the party, it seems, may be drawing to a close.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




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Martin Tillier


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