Prior to last week's bear raid, the large and small specs had been accumulating a sizable interest in the short side of the yen futures. As reported in the COT report on data through 05 04 2010, large specs had short positions of 78,848 contracts, and the small specs had 45,356 short contracts. The total open interest was 166,851 contracts.
On Thursday May 6th, the yen was hit by a big bear raid, which corresponded with the sharp equity sell off. The yen versus the dollar went from .9397 to a low of .8799, before recovering to .9056 at the close. Holders of the short yen crosses received even harsher treatment, an 837 daily range in the yen versus the A$, and a 1247 pip range in the yen versus the pound.
Typically this type of market action, coming when a market is loaded with spec shorts, would imply a short squeeze as the specs liquidated. No doubt some of this did occur, but at the end of the day the open interest in the yen futures increased.
This market action is very peculiar. My guess is that the weak specs, at the mercy of the margin man and the market makers, were rudely escorted to the sideline, but some one took their place. Who? We don't know but it takes deep pockets, nerve and some resolve to fade the wash out.
There is no shortage of gloom and doomers worried about Japan. A Timesonline article from May the 10th entitled "Japan in risky territory: Things could get ugly fast" summarized some of the concerns. They said:
On paper, Japan’s fiscal position looks irretrievably horrendous. It is worse, by some measures, than that of Greece and notably without any clear “exit strategy.” Gross public debt has edged up to 200 per cent of GDP. Net debt, at 100 per cent of GDP, is still in acutely dangerous territory. Persistent deflation, low real growth and the world’s most rapidly ageing population are poor ingredients for debt stabilisation.
Add to that fears that ordinary Japanese, via their savings invested by banks, will soon stop supporting government debt issuance. Yields will soar, and the Government will default, runs the terrifying bear case.
It is difficult to determine how much of this bear case has been priced into the market, but the argument is compelling.
The Japanese recovery rests on the ability to revive exports. This morning the US Trade balance report showed a modest increase in the trade deficit to $40.4B with most of the increase in imports, oil and industrial raw materials.
Japan's largest trading partner, China, seems concerned with slowing their economy, and a higher yuan, which would help Japanese trade, does not appear imminent. Many Japanese exports compete with those from Germany who is benefiting from a weaker euro. Japanese exporters are certain to be pressuring the Minister of Finance for a weaker yen.
We prefer to buy the USD and sell the yen in the 93 area, risking no more than 100 points. Although the crosses do look interesting, the only one we would consider at the moment is the C$ versus the yen.
(Click to enlarge)
Disclosure: No positions