IMM short yen positions increase

The latest data from the International Monetary Market showed that net yen short positions jumped to a record 123,598 in the week ending Oct. 10 from 104,151 the previous week. Such a big amount of outstanding yen short positions suggests that speculators are prone to reversing them in a hurry if the Japanese currency were to stage a rebound near-term. But speculators are not the only ones dumping the low-yielding yen. Japanese household investors also remain sizeable sellers of their own currency to buy foreign bonds.The yen failed to hold gains made on Friday after Bank of Japan Governor Toshihiko Fukui would not rule out the possibility of another rate increase this year, though he repeated the central bank would likely raise rates only gradually.

Most market players believe the BOJ will wait until the first quarter of 2007 before lifting rates to 0.5 percent from the current 0.25 percent, partly to see how U.S. growth holds up. The BOJ’s go-slow approach to normalising rates from zero has prompted waves of investors and speculators to sell the Japanese currency and use the funds to buy higher-yielding foreign currencies and bonds.

Market players said the U.S. currency’s run higher against the yen may finally push it over the 120 yen line this week, but that with short yen positions reaching massive levels the Japanese currency may stage a near-term rebound.

 

More IMM positions

The consensus has developed a USD positive outlook, highlighted by Friday’s release of IMM data suggesting that net positions have turned USD positive for the first time

since April. From 10th April until mid May the USD moved sharply lower adjusting USD long positions. However, the market establishing USD long positions does not mean that a USD correction has to develop immediately. In fact, it can take several weeks before markets adjust extreme positioning. Positioning does not provide too much information about the timing of the next correction, but it provides important information about the possible magnitude of the correction. The timing of the USD downward correction depends on the strength of US data and the rate outlook.

 

Fed speak

Investors will keep an eye out as Fed officials will be out in force speaking on Monday, including Chairman Ben Bernanke, St. Louis Fed President William Poole and San Francisco Fed President Janet Yellen.  Poole gave some of the most cautious remarks yet from the Fed in an interview with Reuters last week, saying that the risks were bigger for weaker growth than an inflation flare-up.

Meanwhile, the front end of the US curve has almost priced out the possibility of the FED cutting rates, suggesting that the USD is unlikely to receive further support from US rates moving higher at the front end of the curve as a FED rate hike is out of the question. FED commentators have provided some interesting insights. While the more

dovish viewed FED members talk tough, (Moscow, Yellen and Bernanke), the arch hawk Poole is no longer ruling out the FED cutting interest rates. If this ‘work share’ is part of a bigger plan it is the correct strategy, bringing down inflation expectation while simultaneously slowly preparing the audience for a rate cut. Benanke, Poole and Yellen will speak, BNP Paribas reports.