USD/JPY has been in a firm-up trend but we could be near a trend reversal speculators are heavily long and we have a bullish extreme. We have the Bank of Japan meeting on Friday and we think they may take the opportunity to surprise the market and help rally the JPY.
The market is now heavily short of the Yen and many traders see it as a one-way bet to go down but the odds of a reversal are high in our view.
Sentiment
On the COT Net Traders Positions, we can see that large speculator's funds are short of the JPY while smart money commercial interests are buying which warns of a trend change:
From a long-term perspective, we can see how short speculators are but this short is bigger than it looks as the explanation and two charts below show.
"The chart above measures the net short versus open interest. Although the short is high, we can see it has been higher, especially in the late 1990s when USD/JPY rose to ~150. However, COT data is based on flows of FX futures, which are low compared to spot and other flows. The net short for the speculator category - which aims to catch hot flows that are more likely to be price moving on a shorter-term basis, and will mainly be CTA flows only about $13.4 billion. More important for the longer-term outlook is how the yen’s steadily weakening path is leading to domestic investors to allow their foreign asset positions to become underhedged. As a proxy, we can look at the behavior of life insurers, who are among the largest hedgers of their overseas positions. Their hedging ratios have slipped to under 50%.” (Simon White)
Japan is the world’s largest net creditor, with around $3 trillion of assets invested outside of Japan. Other major groups are also dropping hedges this means that if the Yen were to rally then these investors would need to initiate hedges or may consider bringing their investments or some of them back to Japan which would cause a massive rally in the JPY however at present the JPY is weak so when will it rally?
Bank of Japan Meeting What Action Could They Take?
Japanese Finance Minister Shunichi Suzuki said last week's meeting with his U.S. and South Korean counterparts had discussed how to act against volatile yen moves, issuing the following statement:
"I voiced strong concern on how a weak yen pushes up import costs. Our view was shared not just in a meeting with my South Korean counterpart, but at the trilateral meeting that included the United States. He added -"I won't deny that these developments have laid the groundwork for Japan to take appropriate action (in the currency market), though I won't say what that action could be." (Japanese Finance Minister Shunichi Suzuki)
They could simply intervene and buy Yen but this would only be a short-term fix and not a long-term solution. We have the Bank of Japan coming up and most forecasters dont see another hike coming before September or even later but they might hike sooner: "If the impact becomes too big to ignore, it might lead to a change in monetary policy,"(Kazuo Ueda Governor Bank of Japan) they need to act.
We have taken out the 155.00 level and the next level in the eyes of the market is 160.00 then 170.00 If we keep in mind US Rates are probably not coming down soon and yields on US bonds are rising so a hike needs to come soon.
The risk is rising for a front-loading of a rate hike in June or July,” said Ryutaro Kono, chief Japan economist at BNP Paribas. "The yen is likely to keep falling gradually,” as the government views intervention as insufficient to shift the tide in light of strong U.S. economic data and escalating geopolitical risks in the Middle East.” Doing a hike before the market expects makes sense and will hit the big speculative short position on stop and also send a clear message to the market that the window of excessive selling is over.
Technical Analysis
Our view of the key levels of support and resistance to look out for below.
