On the first of February, just before the BOJ’s bungled attempt to ease monetary policy, the Bloomberg consensus for USD/JPY in Q4 2016 was 125, with a range of 110-134. Today, the consensus is 118, the range 100-131. That is about as confused as the FX market ever gets.
The CFTC speculative positioning data is less confused – yen longs are above 50,000 contracts, something that happens rarely. This happened in late 2003/early 2004, as USD/JPY broke below 100; In early 2008 as USD/JPY broke briefly below 100; in late 2009 as USD/JPY broke through 90 and a couple of times at the end of 2011 when USD/JPY was at its lows in the 70s. The current spike in positioning represents both a huge capitulation of the bearish yen consensus, and disillusion with the stronger dollar theme as US rate expectations tumble and equity indices fail to benefit from easier policy globally.
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When I look at the positioning history, I draw two simple conclusions.
Firstly, yen trends don’t turn around suddenly just because the CFTC data point to a market that’s very long – it was 7 months after the peak in yen longs in early 2004 before a 3-year USD/JPY rally from 102-124 got underway.
Secondly, these spikes in positioning do seem to me to point to a turn in the tide. Which I think is coming. I don’t hold out much hope of a successful BOJ action to fight the market because policy-makers are still bruised after making a mess of their move in February.
But I do think that quieter markets, the steady-as-she-goes economic recovery in the US and the under-performance of the Nikkei can all help get USD/JPY back up to 120 in the next few months. What would make me change my mind? Bloodbath in global equity markets. Possible but not what our asset allocation team is expecting. Boring equity markets seem more likely to me in the months ahead.