Date: 03 Jan 2018

Amid the currency market action at the start of 2018 that has seen the greenback trade poorly versus the likes of the euro (EURUSD), its relative resilience against the yen (USDJPY) sticks out somewhat. Perhaps the extended public holidays in Japan have limited interest in the pair at the beginning of January but there’s no denying that as of the week ending December 26, data from the US Commodity Futures and Trading Commission (CFTC) showed that while speculators on the International Monetary Market held a net short US dollar position in total, against the yen they held a net long US dollar short yen position to the tune of some US$12.8 billion.

If the greenback is to remain on the backfoot then that stance looks somewhat anomalous. For example, if early 2018 were to see renewed market speculation that the Bank of Japan might tweak its current Yield Curve Control Policy of zero per cent for the 10-year Japanese Government Bond yield, perhaps adjusting it even just slightly higher to 0.1 per cent, that sizeable yen short position identified by the CFTC might begin to look a little vulnerable. Equally if the euro continues its ascent against the US dollar, there will likely have to be some accompanying downside move in dollar/yen or eur/yen (EURJPY) would, purely as a consequence of mathematics, move upwards. Traders might feel that if EURJPY were to continue to soar on the wings of a higher EURUSD that might be likelier to occur if positioning in USDJPY was more neutral. But it doesn’t seem neutral and that could leave the kind of long dollar/yen position, as evidenced in the CFTC data, rather vulnerable if the EURUSD continues higher.

Written by Neal Kimberley, External Currency Analyst.