Forex Investment and Currency Trading

Positioning now favors further yen appreciation toward 90 vs the USD once the 95.77 yen-high is broken.

Japanese retail investors have been raising foreign currency assets mainly through investment trusts and FX margin accounts. Their typical trading pattern has been contrarian i.e. they buy foreign currencies when the yen appreciates, and sell them when the yen depreciates, but over time they have accumulated a stock of foreign currency assets. Long-term Yen domestic carry traders are still broadly un-hedged. If USD/JPY and other yen crosses keep falling, they may begin to hedge long term positions.

Margin trading companies usually request clients to use stop loss orders so as to keep the initial margin value at certain level. For instance, margin traders with 5 times leverage are obliged to square USD long/yen short positions when the USD/JPY falls 14% in order to prevent their margin values from losing more than 70%. There were large amount of such stop loss orders around 105, 101 and below, which helped the yen to appreciate rapidly when those levels were touched. There are further such stop losses around 93 yen, although smaller.

Foreign currency demand will pick up with the start of the new FY when institutional investors typically begin to pile up their foreign exposure. A key question is whether the ministry of finance also ‘loads up’ on dollars though intervention. After all, the recent yen move has been relatively fast, and the spot has fallen below Japanese exporters’ break-even level. The initial break of 100 yen is also psychologically damaging for many.

MoF is very unlikely to intervene to hinder JPY appreciation yet. The yen is still relatively weak on a nominal trade weighted basis, which while still above the long term average since 1980, is still 20% lower than the highs in August 2000 when USD/JPY traded around 104 yen. This reflects the fact that the share of the US as Japan’s trade partner continuously declined since 2000 and the yen has been a lot weaker against other currencies. JPY is even weaker on an inflation adjusted basis. Psychological reactions aside, the real impact of the recent strength of the JPY on the economy is not as large as it looks from the level of the USD/JPY.