BoJ intervenes after investors added to JPY longs

The latest IMM data cover the week from 18 to 25 October.

BoJ likely triggered large position squeeze: Non-commercial investors added USD4.5bn to long yen positions last week, which took net longs back above 30 percent of open interest. This not only helps explain the recent lack of yen weakness at a time when most financial markets are in the process of pricing a lower global recession risk, but also means that the BoJ likely got a bigger bang-for-the-yen in today’s intervention. Recent Japanese interventions have not been successful in delivering sustained yen weakness, however, and until monetary policy is eased more significantly in Japan, we see a high probability of renewed yen position building over the coming weeks and hence also a correction back lower again in USD/JPY. Indeed, today (and the coming days) is likely to see analysts and investors refer to recent JPY intervention episodes and the following corrections lower in USD/JPY as a case for renewed JPY buying.

Long USD positions are being unwound: The dollar has weakened just as rapidly as it rallied and is now almost back at August levels. Recent dollar weakness has coincided with broad-based position unwinding and aggregate net long dollar positions now stand at USD9.2bn – down from USD15.1bn the week prior. A reduction in stretched long positions is consistent with recent improvements in global (and not least US) macro data and hence a reduced global recession risk. There should be room for further position unwinding, however, which could not least benefit the commodity currencies (especially CAD), but potentially also the euro, should the ECB sound less dovish than expected at its upcoming monetary policy meeting.

Danske Bank
http://www.danskebank.com/danskeresearch

Disclaimer

This publication has been prepared by Danske Markets for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Markets´ research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S, which is regulated by FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright (©) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.