Yen Shorts in Panic Mode

April 10, 2016

“We are not so very different, you and I. We’ve both spent our lives looking for the weaknesses in one another”
George Smiley (Gary Oldman), Tinker Tailor Soldier Spy (2011)

When it comes to the foreign exchange market, USDJPY has been one of the main subjects lately – shorts are enjoying themselves for the first time since the monetary easing started, while the longs are praying for BOJ intervention which at this point, seems quite unlikely.

Fortunately, as we all know, central banks tend to surprise us with all sorts of interesting moves when things start to get ugly but at this point, any kind of supporting act from the BOJ would look like a complete surrender by giving the market participants what they desperately want.

The fact that there’s been a lot of complaining about the selloff in USDJPY, more or less confirms the rumor that started in the beginning of the week, that the pair might be overcrowded with long positions. I don’t care if indeed that was the case but I do find something else very interesting about the whole “drama”.

I’m sure you have all noticed that the currency market is not that “central bank dependent” anymore and it chooses to ignore their policy changes if necessary. I’d say it all started with USDJPY as Bank of Japan has been running a very aggressive QE program for years now but the Japanese Yen hasn’t depreciated against the dollar anymore and the highs made in May, 2015 are quite far away at this point. Even changes in the QE program that took place on the 18th of December last year, had an opposite effect for the Yen and of course the famous introduction of the negative rates this year didn’t go quite as planned because after the announcement, Yen kept on strengthening across the board.

We’ve seen similar reaction in Euro as well. On the 3rd of December Mario Draghi surprised the markets by announcing that the ECB is going to revise its monetary policy in the beginning of 2016 and as a result Euro surged 400 pips higher against the US dollar. When the new measures were introduced in March this year, EURUSD moved another 400 pips (give or take 20 points) to the upside, simply laughing in the face of the ECB and their attempts to weaken the common currency. Perhaps that is one of the reasons why BOJ in not rushing into cutting the rates further into negative territory or doing something else interesting, because they are not sure if it will help – maybe it will make the situation even worse.

If I look at the USDJPY chart, then I would say that BOJ has nothing to worry about. Technically we could go all the way to 105.00 area and the bullish bias for the pair would still be intact in the bigger picture. Whatever the case will be, I’m sure we’ll see some interesting developments surrounding that pair in the coming weeks and months.

The second hot subject these days is of course the leak of tax documents from Panama. As the amount of leaked documents is massive, we should expect a long-lasting effect from that event but is it going to have a direct impact on the markets is very questionable. So far it hasn’t affected price action in currency market and the way I see it, the only risk can come from the political side. Prime Minister of Iceland already resigned due to the scandal and we should expect more of these kinds of events in the future if further fraudulent behavior among politicians is discovered.

And last but not least – the FOMC Meeting Minutes. By far the most overrated release of the past trading week because we learned only one thing from there: the FED has no idea how to proceed. Several members of the FOMC were supporting a rate hike in April, while some were against it and when we take into account the fact that Ms. Yellen is probably not siding with the hawks, I find it very hard to believe that the FED is going to surprise the markets with a rate hike before the summer. Most likely, if at all, we should be prepared for possible rate hike in September because the latest data suggests that the US economy was basically at a standstill in the first quarter, which means that now, we need a strong second quarter to justify another rate increase.

Whatever the case will be, time will gives us the answer.
Capital Properties FX

10.04.2016

Capital Properties FX