Commercial traders in the Japanese Yen have built their largest long position since June of 2007 according to the latest Commitment of Traders Report. Clearly, the commercial traders as a group believe that the 24% decline in the Yen over the last year or, so is nearing an end.
Before we discuss the trade, let’s clear up the primary area of confusion regarding Yen trading here in the United States. The Japanese Yen futures market traded at the Chicago Mercantile Exchange is quoted in Dollars per Yen. This leads to a current quote of .009761 yen per Dollar. Meanwhile, Forex (FX) quotes the Dollar Yen cross as, “How many Yen does it take to buy $1.” In this case, it takes 102.45 Yen to purchase $1. Many people get confused when the quote they see on CNBC doesn’t match the quote on the internet. Many times this is simply due to the formatting of the quote. Using the inverse will typically put a strange looking quote in the form you’re used to seeing it in.
Getting back to the trade, it’s clear that Prime Minister Abe’s plan to devalue the Yen has seen early success. There appear to be growing concerns as to how long Japan will be able to continue to devalue their currency. Based on the 60% increase in commercial longs since November 1, it seems clear that the big money is suggesting this round of devaluation is nearing an end. You can see the chart, here.
I use this setup as a reversal strategy. Once the market begins to turn higher, I will look for a spot to get it bought. I will not buy this market until it can make some kind of bounce and at least establish a swing low of some sort. The swing low, once provided, will give me a spot to place my protective sell stop and allow me to determine the risk of the trade and adjust my leverage appropriately.
Patience is the key. Never try to catch a falling knife, so they say.
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