Last Friday, the CFTC released their weekly report of futures positioning. According to the data, which was as of last Tuesday, short positions in the Japanese Yen hit the highest levels since August 2008. At that time, the Yen weakened significantly and soon after a short squeeze pushed the currency sharply higher against the U.S. dollar.

The following chart illustrates the strong relationship between Yen positions and the JPY/USD (the inverse of USD/JPY). Right now the Yen is rising against the dollar despite the fact that traders are substantially short Japanese Yen. This means that should the Yen continue to rise, or in other words USD/JPY continues to fall, there could be an aggressive short squeeze that triggers a big move higher in the Yen and a sharp breakdown in USD/JPY.

A further rally in the Yen will undoubtedly test the resolve of Japan’s Ministry of Finance and at some point, maybe below 87, the Japanese government may feel compelled to step in and vocally criticize foreign exchange fluctuations but until then, the odds are skewed towards further losses in USD/JPY.

 

Kathy Lien is Director of Currency Research at GFT, and runs KathyLien.com.