One of the best performing trades in the Forex Portfolio has been the Long USDJPY trade initiated on May 2nd, 2016. The initial position size was $30,000 but grew to $50,000 within a few days. The average price is 106.53. The target for the trade is 125.
BoJ Does Not Want a Strong Currency
The Chinese stock market rout and debt crisis have pushed investors to safe heavens like the Yen. The Yen has strengthen 12% versus the USD this year. Some of the appreciation is a result of the Fed turning more dovish during the first four months of the year but with the Fed unlikely to hike in the near-term the BoJ will be forced to act in the best interest of Japan and weaken its currency before its strength hinders the Japanese economy.
USDJPY has Bottomed
The rhetoric from the BoJ began to fall on deaf ears in February and continued through the end of April. The market was tired of “jawboning” and wanted the BoJ to announce a program to inject liquidity into the market. The last leg down went sub 106 USDJPY which sounded the alarm bells at the BoJ. It is frustrating to listen to Finance Minister Taro, Prime Minister Shinzo Abe and BoJ Governor Haruhiko Kuroda say they are, “watching the market and will act if needed” after a huge move. What are they waiting for?
There is a chance that JPY needs to strengthen more before another round of liquidity can be justified. On Tuesday, Finance Minister Aso said that USDJPY at 100 could trigger intervention but Q1 earnings were off for Japanese companies due to the strengthening of the Yen which makes me question if the BoJ will let the strengthen that far.
Hedge funds have piled on Long JPY Trades
According to Bank of America Merrill Lynch, the Long JPY (XJY) trade participation is near all time highs which gives the possibility of a nice squeeze opportunity when the crowded trade is unwound. This could already be happening after seeing the 300 pips gain during the last week in USDJPY. The JPY Bulls have run out of gas and are looking for the door.
JPY Strengthening is Limited By The Supply of Yen
The ‘Soros Chart’ does a great job at explaining the significance of the JPY money supply approaching that of the US. Why has JPY strengthened over 10% versus USD this year if the supply of Yen has been growing at such a fast rate? A “dovish” Fed can explain some of the move but the macro data supports a weakening currency not a strengthening one.
BoJ will act after G7
The BoJ is unlikely to act before the G7 because of its agreement to not manipulate currency based on competitive advantage in world trade. The Japanese have been quick to point out that the US would not be bothered by further easing. It would be unlike the Japanese to announce a program before the summit because they don’t want to explain themselves to the other six nations during the meetings set for late May.