Commercials were right on the yen

March 17, 2016 09:00 AM

The Bank of Japan surprised the markets on Jan. 29 when they announced that they would charge a portion of current account deposits 0.1%. This move is the latest attempt to devalue the Japanese yen and spur economic demand for Japanese goods and services. The yen fell more than 250 points that day and 5% from the preceding week. Market, “surprises” only occur when one side is hopelessly wrong. The “Commitments of Traders” report suggests that commercial traders weren’t surprised at all. In fact, they’d been building a position tailored to this outcome for quite some time. More importantly, they expect it to continue.

Setting the stage requires going back to last summer. Commercial traders were big yen buyers based on the successful efforts of the BOJ and Prime Minister Shinzo Abe’s commitment to inflating the economy since his election in 2012, and their GDP has grown in eight out of the last 10 quarters. Commercial traders reached their third largest net long total at last year’s June low because they believed the recent economic progress would halt the last few years’ worth of devaluation. While the market held its own, it didn’t make much headway, closing the second half of 2015 flat.

Moving to December we had two major events. First, commercial traders, having held out as long as they could, began selling yen ahead of the Fed rate hike. Second, the BOJ announced multiple new measures, including extending durations, to increase their decades old version of Quantitative Easing. This caused the yield on the 40-year JGB to fall to 1.43% and also sent the commercial traders to the exits. The end result of this is that commercial traders have sold approximately 155,000 contracts since Dec.14. 

Historically, large moves by the commercial traders precede large moves in the underlying market. This works out in broadly falling markets as it allows the commercial traders to position themselves as sellers within the rallies of a market’s sideways periods and puts them on the winning side of the moving averages as they catch up through time and price. This works out more quickly during market “surprises.”

Strong resistance will meet rallies in the yen as the market nears long-term moving average pressure beginning around .8690 in the futures or, 115 yen to the dollar. This area also coincides with the .382 Fibonacci resistance level from the 2014 high. Commercial traders already have turned to the sell side on any meaningful rallies as they take the BOJ’s currency devaluation plans to heart. Open interest in yen futures has increased by approximately 10% since mid-December. This is a jump of about 20,000 contracts. More importantly, the small rally the market saw in January has been fueled by bottom-picking small speculators who’ve added almost 20,000 contracts. Very rarely are the small speculators right at the expense of the commercial trader group.

Finally, these selling opportunities should lead to new lows, fueled by the waning interest of bottom-pickers and washed out speculators; we expect it to fall through last June’s low at .007986 or more than 125 yen to the dollar. Trend followers will most likely add to positions as the market falls, thus rebuilding open interest and pressing further declines.

About the Author

Andy Waldock, owner of the brokerage firm Commodity & Derivative Advisors and the subscription service, is a third generation commodity trader with over 25 years of experience on all of the main U.S. exchanges. Andy stays abreast of modern programming developments due to the trading programs he employs for his own account and managed money.  He can be reached at