New Trade $FXY – Turning Japanese

by Enis December 13, 2013 10:56 am • Commentary

The overnight price action in the USD/JPY cross has been quite a move.  The cross brook out to a 5 year high above the May high of 103.74 around 11 pm, but only held that breakout for a couple hours, and has been straight lower down to 103 this morning.  Here is what I wrote in last week’s CotD post:

All macro traders are closely watching the cross near that May high of 103.74.  One of my favorite traders to watch on macro moves is Erik Swarts of the Market Anthropology blog.  His post yesterday outlined the extreme speculative positioning in short yen/long Nikkei.  While the whole post is worth a read, here is his assessment of the currency pair:

With non-commercial speculators short the yen spiking to a fresh six year high last week, commercial traders have built their largest long position since June of 2007. Generally speaking, while day traders may win a few nice rounds at the table, the house typically get’s it all back and then some.
Screen Shot 2013-12-03 at 6.22.49 AM

Shortly after this post, we received a question (on Dec. 3rd in our Your Questions Answered section) from one of our subscribers:  

With the possible turnaround in the Yen, will Risk Reversal have any trades to capitalize on that move?

And my response:

We’re quite short stocks with all of our current positions, which will likely correlate with a turnaround in the yen, as is happening today. Our thought on a FXY position is that we’d rather see the momentum slow over the next week, and maybe look to get long FXY on a retest of the recent low. For now though, doing nothing in it.

Indeed, that’s exactly what we’ve seen in the past 10 days.  FXY is retesting its low from last week, but on improved momentum.  Moreover, the failed breakout overnight to a new low for the yen vs. the dollar has me thinking that a lot of trapped buyers could get more aggressive in the coming weeks. Sentiment and positioning remains extremely one-sided in the yen, but the price action is starting to show signs of fatigue for the short yen trend.

MY TRADE:  IV in FXY is only around 10, low enough that we’re comfortable just doing a 3 month outright call position to play for a bounce, rather than mess around with more complicated structures.  March expiration gives us plenty of time, and should be a double if FXY bounces to around the 98 resistance level in the next month.

TRADE: FXY ($94.72) Bought Mar 97 Call for $1.17

Break-Even on March Expiration:

Profits: above 98.17

Losses: btwn 97 and 98.17 lose up to 1.17, lose the full 1.17 below 97