Get ready for the great unwind in yen-Aussie dollar trades.
That, at any rate, is the view from JP Morgan’s Japan currency strategist Tohru Sasaki.
As he noted on Friday, Japanese retail forex margin traders have not reduced their yen shorts much on an aggregate basis, despite the brutal yen appreciation seen last Thursday (nearly 14 per cent against the Aussie in less than 24 hours and nearly 6 per cent against the euro, to Y113.67).
According to Sasaki’s estimates, the total amount of aggregate yen shorts held by FX margin accounts was Y5,500bn ($59bn) as of May 13 compared to the recent peak at Y6,3oobn on May 5.
The most notable move was in AUD/JPY, Sasaki writes:
FX margin accounts increased JPY shorts against AUD even on May 6, when AUD/JPY declined by near 10% and after then, they continued to accumulate JPY shorts against AUD. The estimated amount of long AUD/JPY position was A$28 bn (Y2,300bn) as of Thursday, close to the historical high.
This suggests the heightened risk of potential unwinding once AUD/JPY turns direction again.
In an earlier note, in February, Sasaki estimated that the “pain threshold” in AUD/JPY was about 10 per cent below the entry level – or about Y75.3 to the Aussie, using the average spot level for AUD/JPY this month, Y83.7, as a proxy for the entry level.
That means that if AUD/JPY breaks its recent low of Y77 reached on May 6, we are likely to see a “huge unwinding” of long AUD/JPY positions.
As Japanese retail investors keep short yen positions against other key currencies as well, watch out for potential unwinding of these positions, adds Sasaki. As of May 13, the estimated amount of JPY shorts stood at Y900bn against the US dollar, Y1,100bn against the euro, and Y900bn against the pound respectively.
Speaking of which, it looks like more action coming up on the euro/yen front – all down for the euro. Sasaki on Friday cites the latest data from Japan’s investment trusts association, which show outstanding euro-denominated bond holdings by all investment trusts decreased 22 per cent in the January- March quarter, while euro-yen long positions declined by about 6 percent in the period.
Based on these numbers, Sasaki reckons that Japanese investment trusts sold Y544bn (€4.7bn) worth of euro-denominated bonds in the period. They still held Y3,600bn (€31bn) worth of euro-denominated bonds as of end-March (April data is due next week) and held an estimated Y900bn (€8bn) in EUR/JPY long positions (EUR8 billion) as of last Wednesday.
Thus, says Sasaki:
Stop-loss sales of EUR/JPY by investment trusts may further accelerate the downward movement in the pair.
The yen has indeed been on a rollercoaster in the past couple of weeks, shining in the days before the May 10 announcement of the eurozone’s massive bailout package as a safe-haven currency alongside the dollar.
But the currency’s appeal has lessened significantly in recent days, amid recovering demand for yield and appetite for risk, and on Friday the yen had slipped back to Y116.61 against the euro in London morning trade.
Bloomberg reported on Friday that the yen weakened against 14 of its 16 major counterparts on speculation that US figures due later in the day would show a rise in retail sales for the seventh consecutive month and a gain for consumer confidence in April, driving demand for higher-yielding assets.
While everyone from investor Jim Rogers to ex-Fed grandee Paul Volcker throws doubts on the euro’s future, it’s also time perhaps to take a breather from the yen’s warm embrace.
Related links:
Japan pumps funds into the market – Money-Supply
Mood turns cautious as bail-out euphoria fades – FT
Asia takes a hard look at Europe – FTAlphaville
Japan’s brewing fiasco – FTAlphaville