Are Yen Bears Out Of The Woods?
Traders may want to keep an eye out on Wednesday for comments from Federal Reserve officials. Dallas Fed Chief Robert Kaplan is due to speak at 1130GMT, New York Fed President Bill Dudley at 1330GMT and the head of the Chicago Fed, Charles Evans, at 1615GMT. While it might be logical to expect senior Fed officials to play down the importance of recent market volatility, it might also be realistic to also expect them not to currently play to appear too hawkish. Some analysts have argued that the equity market price action seen recently reflects corrective behaviour of stock markets that had got ahead of themselves, arguably with the volatility exacerbated by the greater influence, these days, of algorithmic trading. Correction may be followed by equity market consolidation, they argue. If that scenario is accurate, how might it affect the currency markets? Dollar/yen (USDJPY) might be one area of focus, given that the yen exhibits safe haven attributes at times of equity market turmoil. Indeed as equity markets fell earlier in the week, so did USDJPY, diving well below 109.00 and, if the anecdotal evidence from Asia is right, then drawing out Japanese investors who thought that at that point it was oversold.
The pair subsequently bounced to 109.72. Did opportunistic Japanese investors then cash out? Has the continuing structural short yen position evidenced in CFTC data been washed out to any material degree? These are the kinds of questions traders may wish to ponder even if their instinct is that any calming of equity market price volatility could lend itself to a higher USDJPY. Some traders might feel it’s a little too early to conclude USDJPY has conclusively made a base. And, with talk of some 1.8 billion US dollars of option expiries on Wednesday (1500GMT cut) in the 109.20-60 range, it might also be argued that there’s too much congestion on the day for USDJPY to make too much room on the upside, at least before those options expire this afternoon.
Written by Neal Kimberley, External Currency Analyst.