Wednesday, November 28, 2012

Yen weak on fundamentals but could become a crowded short

As discussed before (see post), Japan's fundamentals have been working against the yen.  Political pressure on BOJ (see discussion) and weak economic conditions are likely to result in a highly accommodative monetary policy. Even under the current government, the latest QE program has been accelerated (which is bad news for the yen). The chart below shows JGB purchases specifically as part of the latest monetary expansion (isolated from other JGB holdings).

Source: BOJ

The yen, which to a large extent no longer acts as a "safe haven" currency (see discussion) has been losing ground (as an example, over the past month both the yen and the S&P500 are down).

JPY (per one dollar)

There is no question the fundamentals point to further yen weakness. Technical factors however may be indicating that JPY is becoming a crowded short. The Goldman sentiment index (which is based on speculative futures positioning) has shifted against the dollar (in yen's favor).

Source: GS

GS: - Our JPY Sentiment Index took another dive after recovering somewhat in the last report; it now stands at 12.8 and is close to exhibiting signs of stretched short positioning (SI below 10). After some reductions in the prior week, traders again built sizeable short positions in JPY, with short JPY positioning increasing by almost 50% ($3.9bn) from the last report.
Therefore in spite of these bearish yen fundamentals, one needs to become more cautious being short the yen due to technical headwinds. The unwind of the crowded short could prove painful.
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