USD/JPY: Positioning still the great unknown, risk-reward favours bears
Pretty much every analyst you listen to is trying to outdo one other with their bullish USD/JPY calls; 105 is conservative, 110/115 is normal, and only calls for 125 or 200 (as in one case) are getting much airtime. The case for the bulls seems watertight; USD sentiment is bullish and their economy is seemingly on the improve whilst the Japanese government is intent on driving the Yen lower.
So what can go wrong for the bulls? Very simply that the 25/30% move higher that the analysts are calling for in USD/JPY has already happened! Everybody seems to forget that we spent months and months trading below 80 and from there we rallied almost to 105 on the back of much looser BOJ policy and an improving US economy.
That’s not to say that we don’t get another 25/30% rally but what we must also remember is that traders are much cleverer than analysts. The big clever traders have been long since 80 and have been building macro long positions up through 85 and 90. We’ve already seen one of the biggest macro funds dump their positions in early April causing USD/JPY to fall 10 big figures. There are other big positions out there (and I’m talking multiple macros with positions of 15billion+); perhaps we do go up in a straight line and these guys make squizillions but it’s August and many are going on holidays. It’s a dangerous time for these traders.
Timing is everything in the FX market and its impossible to pick the next 150/200 pips with any high degree of accuracy. But, the best risk-reward in USD/JPY for mine is in being short. If the big macros start bailing, we will be back at 90 very quickly.