Specs Increasingly Bearish on Yen. Are They Wrong?

Focus: FOREX

Jack Crooks Image Jack Crooks President, Black Swan Capital LLC

Given the weakness in the US dollar, likely because of the collapse of Trump’s agenda and ongoing re-rating of global central bank rate hiking campaigns, why would so many become bearish on the yen? Jack Crooks of Black Swan Capital offers answers.  

Quotable

“Uncertainty is an uncomfortable position. But certainty is an absurd one.”

—Voltaire

Based on the positioning in Japanese yen–US dollar (USD/JPY) futures, as measured by the weekly Commitment of Traders Report (COT), speculators are increasingly bearish about the prospects for the Japanese yen as you can see from the chart below: 

chart 1

Net short positions for speculators has grown to 112k contracts based on the latest COT report; the biggest short positioning since late June 2015. 

Given the considerable weakness in the US dollar lately, likely because of the collapse of President Trump’s agenda and ongoing re-rating of global central bank rate hiking campaigns relative to the US Fed, why would so many become bearish on the yen? 

At first blush, it would seem many are positioning short yen in the belief the yen carry trade is back in vogue; i.e. borrow the low yielding currency, then invest those proceeds into higher yielding alternatives; thus, selling the borrowed yen (weakening it in the process).  

It’s not just international specs who get in on this game, as domestic Japanese investors effectively make the same trade by moving money offshore to higher yield locals outside Japan. 

The carry trade has a self-reinforcing momentum.

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