This has been a tough week for anyone involved in two of the markets most crowded trades – long the Nikkei and short yen. Dealers and investors like volatility, it provides opportunity. However, having an equity index decline -7.9% in a single session is maybe a tad too much for some individuals to stomach.
Even though risk aversion promotes holding yen, it’s the “capitulation” trade that underlies much of the USD/JPY move lower this week. Mind you, investors can also point blame at a few "official comments" that have also aided the yen’s in its rapid rise. Earlier this week, Japan’s Economic minister said that the yen’s gain is a natural reaction to curb the overly rapid equity rise. Combine this with the MOF data revealing that the domestic investor was selling foreign assets again last week and this market had the basic ingredients to ignite a yen rise.
Despite the market being deeply negative on the yen, which would suggest that dollar bids remain on the downside, the mere presence of such enormous paper profits in long Nikki and short Yen is making profit taking as the markets' prime motivator lower. Even though foreign hot money has been driving the Japanese equity rally and the yen decline, the dollar bids could disappear if prices were to make an assault on ¥100.
Next week, Kuroda and BoJ will set the initial tone for yen trading ahead of Japanese inflation numbers later in the week.