[Forex] What are the conditions for a sudden reversal of yen buying, contrary to July 2024? | Yoshida Tsune's Forex Daily | Manekuri Monex Securities' investment information and media useful for money.

The rapid appreciation of the yen a year ago caused by the reversal from "oversold" yen

In the context where the USD/JPY rose to 161 yen in July 2024, the speculative positions of the yen according to CFTC (Commodity Futures Trading Commission) statistics were short (long on USD) with 180,000 contracts, expanding to the largest scale in history. However, that record large short position on the yen almost disappeared in just about a month, leading to a dramatic drop of approximately 20 yen in the USD/JPY (see Figure 1).

[Figure 1] USD/JPY and CFTC statistics on speculative yen positions (from May 2024) Source: Created by Monex Securities based on data from Refinitiv. Recently, it has been almost the opposite, with a record significant net buying of yen (net selling of US dollars) continuing. So, this time, will there be a sharp rise in USD/JPY as net buying of yen dramatically decreases?

Two Reasons for the Crash of the USD/JPY in Summer 2024

After July 2024, the record oversold of the yen suddenly reversed for mainly two reasons. One reason is that, not only in 2024, but from July onwards, there was a tendency for excessive positions to be unwound.

The CFTC statistics show that speculators' positions in yen expanded their net short positions in the middle of 2022 and 2023 amid a significant depreciation of the yen, but both began to contract towards August (see Figure 2). In this way, as yen buying spreads, the USD/JPY rate repeatedly showed bearish candles (USD depreciation and JPY appreciation) not only in 2024 but also in July.

Looking at it this way, one reason for the yen's "oversold" rapid reversal starting in July 2024 may have been the usual practice of unwinding excessive positions before the summer holidays.

[Figure 2] CFTC statistics on speculative yen positions (from January 2022) Source: Created by Monex Securities from Refinitiv data Still, in July 2024, the excessive yen selling positions began to be unwound, and they disappeared in just a month. Why did the unwinding of yen selling positions become more pronounced in 2024 than in the previous two years?

In the comparison between July 2024 and July 2022 and 2023, there was a relationship with the 120-day moving average (MA), which is seen as a benchmark for breakeven points by typical speculative players such as hedge funds. In July 2024, as the USD/JPY fell back, it soon breached the 120-day MA, whereas in July 2022 and 2023, although the USD/JPY also fell back and formed a bearish candle, it did not break below the 120-day MA (see Chart 3).

As seen above, another factor that may have contributed to the expansion of the yen "oversold" reversal starting from July 2024 is that the yen short positions fell below the breakeven point.

[Figure 3] USD/JPY and 120-day MA (January 2022 - ) Source: Created by Monex Securities from Refinitiv data

Is there a sudden rise in the summer USD/JPY, contrary to a year ago?

Let's整理 what we've seen so far. In July 2024, there was a sudden reversal from the yen being "oversold". The beginning of this was likely a move to整理 excessive yen selling positions as summer vacation approached, as is usual each year. However, as the yen selling positions eventually fell below the breakeven point, concerns about expanding losses grew. To avoid increasing losses, there was a rush to close yen selling positions (buying back yen). As a result, the largest scale of yen selling positions disappeared in just one month, leading to a massive drop of about 20 yen in the USD/JPY.

As of June 10, the CFTC statistics show that the speculative long position in yen was 140,000 contracts (short on USD). Although the long position in yen has narrowed compared to a certain point in time, considering that the highest long position in yen recorded before 2024 was 70,000 contracts in 2016, it seems that a record situation of yen being "oversold" continues (see Chart 4).

[Figure 4] CFTC Statistics of Speculative Yen Positions (2005 - ) Source: Created by Monex Securities from Refinitiv data The yen, which has been "oversold" in 2024 as we have seen so far, is now in a seemingly opposite situation. So, will there be a rapid rise in the USD/JPY due to a reversal from the "overbought" yen, contrary to what it was a year ago?

Focus on the Breakeven Point for Yen Buying Positions

The sudden reversal of the yen being "oversold" since July 2024 is thought to be largely due to two factors: the adjustment of excessive positions before the summer vacation and the impact of breaching the breakeven point. Regarding the former, it is likely that, similar to this time, as the summer vacation approaches, excessive yen buying positions will be adjusted. What about the latter?

The breakeven point for hedge funds, which are representative of speculative investors, is currently around 148 yen, based on the 120-day moving average. If the USD/JPY surpasses this level, the risk of losses on yen buying positions will increase, which may lead to an expansion of position liquidation, meaning an increase in selling yen and buying back USD. This could also be a significant factor in considering how far the USD could appreciate and the yen could depreciate.