Speculators Continue to Sweat Long USDJPY Positions
It’s a fascinating game playing out in USDJPY now, with the big question: at what point will speculators get margined out of their long positions? What price point would it take on the downside to tip 50.001% of the specs short positions onto a margin call? The battle lines between the Bank of Japan and speculators is probably going to be drawn somewhere below 80.00, would be my guess. What we need to be mindful of in this, what traders call a “squeeze”, is that this is not “a zero sum game”, as it would be in cotton, or corn, where the supply is finite. The “shorts’ in this market, presumably the BOJ, do have some influence on the supply of currency, and do exert influence on the primary dealers of securities worldwide. The majority of the long on the other hand are speculators who have no influence other than exiting their positions, or putting on more long positions. And I’m also guessing there are a new crop of shorts strung out, based on the amount of e-mails I’ve been getting in my “junk” folder nearly every day for the past 3 months from a hedge fund trader turned internet marketer who is convinced fortunes will be made shorting the yen — buying USDJPY — because, among other things, hedge funds have already bet fortunes on the same trade.
We can see in the Daily chart below of USDJPY where price is currently below its monthly directional line, below its weekly directional line, and below it’s daily directional line.
I had been sticking to the company line, which I’ve been parroting on the Clovernest Daily Forex Report for months, that USDJPY near 80.00 would be close in price and time to a potential long-term bottom. I think we may now be particularly close in time to a potentially important inflection point, but perhaps still further to go price wise. The risk in this market looks to be that speculative longs would be forced to produce still more margin money to hold their positions. If the margin calls expand as the yen continues higher, which is how these things often work, then we could see a small bubble of sorts before the score is settled. So I’ll be revising my estimates for a potential long-term bottom somewhere south of the 1995 low of 80.00.
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Jay Norris is Chief Market Strategist at Clovernest Financial Group, and the author of Mastering the Currency Market, McGraw-Hill, 2009.
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