Sean Callow, Research Analyst at Westpac, suggests that the Japanese yen remains the strongest G10 currency so far this year, up 11% against the US dollar.

Key Quotes

“But at time of writing, USD/JPY is above 108, well clear of the 3 May low of 105.55 which printed in the days following the Bank of Japan’s largely unexpected steady hand. This is a notable recovery given that the US 10 year treasury yield has fallen about 5bp over the same time, which should make USD less attractive to Japanese investors.

With the Bank of Japan’s next policy decision a distant 16 June, what else can account for the recovery in USD/JPY? Profi t-taking on long yen (short USD/JPY) postions probably accounts for some of the yen’s pullback. CFTC data shows leveraged funds (mostly hedge funds) in futures markets switched to a net long JPY stance in the week ending 12 January, when USD/JPY was above 117. These speculators boosted their long yen positions to a net 46.3k contracts on 12 April, at which point USD/JPY was 108.50, a hefty mark to market gain.

Data in the week including the BoJ’s 28 April meeting shows that even as USD/JPY tumbled more than 5 yen in disappointment over the lack of new easing measures, leveraged accounts reduced their net long yen positions sharply, from around 46k to below 30k. So perhaps the weight of money has been to view the USD/JPY slide under 106 as time to take profi t, not to hope for further decline towards 100.”