Unsustainable Yen Rally Out of Gas

The Japanese Yen’s rally since their move to negative interest rates has been an economic phenomenon that I simply can’t get my head around. Perhaps a case of the government not taking more is akin to losing a foot rather than the entire leg? I suppose my lack of understanding is one of the reasons I follow the collective actions of the commercial traders in the commodity markets. While any individual can be wrong at any given moment, the commercial traders, as a group, have a knack for having the right position on at the right moments. Whether by research or algorithm by hook or by crook, there is little question in our minds which group we should be following. Today, we’ll update you on their most bearish position in the Japanese Yen in more than six years.

The surprise move to a negative interest rate policy in late January significantly changed the landscape of the Japanese Yen trade. The initial move lower washed out approximately 10% of the open interest. More importantly, looking at the total position for the large speculators and the commercial traders from that week’s action, we can see that the large speculator position declined by 25% that week while the commercial position increased its position by nearly 50%. The movement and calculations are based on the net positions of the two trader groups. The raw numbers are (12,750) and +27,510, respectively. The point is that the commercial traders were on the right side of the announcement and correctly predicted the market’s direction higher in the face of an exceptionally dovish move.

The current situation also shows the effectiveness of the commercial traders as they’ve used the correctly forecasted rally to not only offload their long hedges but, because of the rally’s significance, the commercial traders have actually turned to significant short hedging. The same collective wisdom that led to the counterintuitive rally on the Ministry of Finance’s surprise move to negative rates is now telling us unequivocally, that the Yen is overvalued. Commercial selling has led to their most bearish position since March of 2008 and triggered a short sale on our mechanical Commitments of Trader’s program on May 4th. We believe this reversal is genuine. Therefore, we’ve included some logical Fibonacci targets on the included weekly chart, below.

The weekly Japanese Yen chart shows the magnitude of the commercial traders' bearishness and associated Fibonacci re-tracement levels.
The weekly Japanese Yen chart shows the magnitude of the commercial traders’ bearishness and associated Fibonacci re-tracement levels.

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