Don't get onto the near side of this boat!
The view might be great -- everything looks good -- but once it gets out of balance, you better be wearing a life jacket.
Let's look at three massive trades over the past week.
USD/JPY squeeze higher on the BOJ
USD/JPY jumped 250 pips on the Bank of Japan shift to negative rates. Into the decision, yen longs (ie USD/JPY shorts) were at the most-extreme level in three years. Kuroda knew that and that's why he surprised the market.
The 'negative rates' headline absolutely crushed shorts but it wasn't all that it seems. It was littered with caveats and that allowed to USD/JPY to completely recover -- once the crowded shorts were cleared out.
Buying the dips was the automatic trade in this pair for months. People made fortunes staying long USD/CAD on the break of 1.34 and up to 1.46. The warning sign was on Monday the Canadian dollar fell despite a drop in oil. That sucked in more longs and when oil surged Wednesday, they got absolutely blown out.
Dollar longs in general
Being long the dollar was the trade of the year in 2015. The underlying theme was central bank divergence. Throughout Jan and early Feb, questions began about whether the Fed would actually hike again but the dollar held up well. On Wednesday, it broke down. The were headlines from Dudley and the soft ISM non-manufacturing data but that was the straw that broke the camel's back.
What we learned
The lesson is that it's not always a headline that breaks a market, it's that final person lurching to the crowded side of the boat. When you're in a trend and you're not alone, that's usually a good sign but you have to be careful and ready to abandon ship.
Now, if we extend it one more step: Is it time to get long USD again? The weak hands were probably cleared out.