The yen's dramatic start to the week above the closely watched 140 level has sparked soul-searching among investors, with some traders locking in profits ahead of this week's monetary policy decisions by the Federal Reserve and the Bank of Japan, while others are looking to add to their long yen positions, betting on a big rate cut from the Fed.
Net long positions in the yen against the dollar fell to the lowest in about four months on Monday, according to data from Click 365, a foreign exchange trading platform on the Tokyo Financial Exchange.
The number of open positions by individual investors—buying dollars and selling yen—also increased to the highest level since late July, suggesting they are starting to sell the yen after it rose against the dollar for five consecutive days.
Retail investors increase long USD/JPY positions
A report from the Bank of Japan shows that Japanese individual investors account for about 30% of global retail investors' foreign exchange transactions. According to data from the Financial Futures Association of Japan, the volume of over-the-counter foreign exchange margin trading in July was about 145.5 trillion yen (10.35 trillion U.S. dollars). This is the largest amount since the data began to be collected in November 2008.
Individual investors tend to take a contrarian stance, according to strategists. The yen's move close to 140.25 last week, its highest since December, could lead investors to "expand trading volume, buy dollars and sell yen because the (yen-dollar) trading level is already high," said Tetsuya Yamaguchi, chief technical analyst at Fujitsu Securities.
However, Yamaguchi said there is now a "high probability that the yen will continue to appreciate and the dollar will continue to depreciate" as monetary policies of Japan and the United States diverge, with the Federal Reserve expected to cut interest rates this week. "There is a risk that those who take a contrarian stance and sell yen will be forced to buy yen to reduce losses," he said.
“We have seen some long-term investors unwinding their earlier long yen positions, but investors are still interested in adding downside bets on dollar-yen crosses,” said Antony Foster, head of G10 spot trading at Nomura Holdings in London.
The risk for funds with long yen-dollar positions is that the Fed doesn’t cut rates aggressively, which could cause the dollar to rebound. Swap market pricing currently shows about a 70% chance of a 50 basis point rate cut this week.
“The dollar has been under pressure as market pricing has reached fairly extreme levels and the risk in the short term is that there is some kind of disappointment in the market which could lead to a liquidation of positions across asset classes,” said Martin Whetton, head of financial markets strategy at Westpac Banking Corp. in Sydney.
The article is forwarded from: Jinshi Data