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Keynes said markets can remain irrational longer than you can remain solvent. This is especially true for currency traders. For the last 3 months, data indicates the majority of traders have been on the wrong side of the market.

The Euro

For the first time in the past year, traders are net long the Euro (NYSEARCA:FXE).

(click to enlarge)

Part of the euro's recent run up can be explained by stop triggering, as currency traders have been net short. Traders who have been bearish on the euro are now reversing their positions, considering events such as a positive Spanish bond sale.

Traders and analysts now predicting the Euro can advance against currencies other than the USD, such as the Swiss Franc.

But the Euro has been range-bound, although moving up slightly it's been stuck in a 300 pip range since mid-December and about a 120 pip range last week. Likely, traders are waiting for news from the situation in Europe, such as today's meeting of finance ministers, the first of the year.

The Yen

A bigger wild-card in recent Forex history has been the Japanese Yen. A new government led by Shinzo Abe has caused a volatile slide in the Yen, bucking the multi-year trend of USD/JPY down.

The markets continue to have high expectations of "Abenomics" - ever since the Abe administration unveiled an emergency package of JPY20trn including JPY10.2trn of actual fiscal spending, the markets are increasingly pricing in a positive impact of the measures and consensus has upgraded its economic forecast for the first half of 2013.

Traders who were long the Yen have been stopped out or worse. It seems that the Abe administration has created a trend that will persist throughout the year.

This can be a clear trade: Short the Japanese Yen.

Sell Yen

(click to enlarge)

This is a Daily chart of USD/JPY since August 2012. Just to be clear for those not familiar with Forex pairs, a chart of USD/JPY seen above means the USD is going up and the Yen is going down. So to short the Yen, in a Forex account, one would buy USD/JPY.

This is a long term trade, but there may be days with big swings up as seen on this chart, several bars from the right.

If you want to take this trade with a stock account, one would sell Yen (NYSEARCA:FXY).

Important BOJ meeting

In an article titled "Yen bulls warming up" FX Street mentions the current BOJ meeting:

The two-day BoJ monetary policy meeting has started, grabbing investors' full attention at the beginning of the trading week. It is worth noting what the central bank will look into: doubling its 1.0% inflation target to 2.0%, expanding its balance sheet by ¥10 trillion and the likelihood of lowering the interest rate paid on excess reserves below the actual 0.10%.

This article is not the only market chatter about a possible Yen reversal. A Bloomberg article, though less opinionated, describes the reasons why it may reverse:

"It's hard to see what the BOJ could say tomorrow that would exceed market expectations," said Daragh Maher, a currency strategist at HSBC Holdings Plc in London. "It's a natural positioning ahead of the Bank of Japan's meeting given the yen's decline."

Basically, they are stating the reasons for reversal similar to "buy the rumor, sell the news" that in fact, the recent decline in the Yen has already priced in any action taken by the BOJ such as lowering rates, increasing the inflation target, or even something more extreme (such as a QE policy).

Other pairs

The Yen pairs dominate the Forex market in terms of volatility, having .91% - 1.14% volatility, compared to the EUR/USD volatility of only .24%.

Traders are mixed on other pairs, waiting for direction, while they play the Yen. Even considering the average sentiment on the Euro is now bullish, the total net longs is only slightly positive, basically a neutral bias, compared to the majority of last year where the market was net short. This means that as far as the Forex markets go for the near term, traders are neutral except on the Yen.

Forex Risk Disclosure - Click here to read

The risk of loss in trading foreign exchange markets (FOREX), also known as cash foreign currencies, or the FOREX markets, can be substantial.

Source: Currency Markets Continue To Baffle Traders, Except The Yen