Japanese retail investors, popularly referred to as Mr and Mrs Watanabe, who have built up large yen short positions may be at risk of having those positions liquidated if the strength of the yen continues to go against them, says Sue Trinh, a senior currency strategist at Royal Bank of Canada. That could result in a disorderly sell off in the dollar yen, as occurred in March, when it fell from 79.75 to 76.25 in just a few minutes, while AUDJPY fell from 78 to 74.50 in the same period. Trinh argues that the sharp move then was positioning-driven liquidation rather than a response to any fresh news event – indeed sentiment had actually soared in the lead up to the move. The risk of a similar liquidation is growing now because of downward pressure on US yields and the Bank of Japan’s persistence with its policy of managing the pace of JPY appreciation, rather than engineering outright move as the Swiss National Bank did recently.
“We could see another dramatic positioning-driven liquidation that should see USDJPY continue lower,” says Trinh. Trinh adds that although the majority of yen shorts are against the US and Australian dollars, it is less liquid currency pairs such as GBPJPY that would be most at risk of a collapse following a liquidation of JPY short contracts.
Back in March, GBPJPY longs represented just 10% of all JPY shorts on the Tokyo Financial Exchange, but GBPJPY collapsed 6% compared to the 4.4% selloff in AUDJPY and USDJPY, where almost 75% of the JPY shorts were concentrated at the time, says Trinh
The report says that key points in current positioning suggest liquidation levels are 74.50/80 for USDJPY and 75.00/50 for AUDJPY. At the time of writing, AUDJPY was already trading below this at 74.50.
While investors should be aware that liquidation is not restricted to any particular time of day, previous dramatic moves such as those witnessed in March, have happened if JPY crosses are below liquidation levels at the TFX opening.
However, not all currency strategists believe USDJPY is destined for a collapse. Geoffrey Yu, currency strategist at UBS, says dollar-yen is in fact likely to go up after the announcement of the stimulus package Operation Twist in the US. “Operation Twist raises the short end of the US yield curve, widening the US-Japanese short-term interest spread, and that’s where the correlation in dollar-yen is more sensitive” says Yu.