According to the most recent CFTC Commitments report, traders added to already piled on shorts for the week. The extreme bearish sentiment has implications for the yen and its crosses heading into the next couple of days, with a potential reversal brewing for the Asian currency.

Report Details

Following Japanese Prime Minister Noda’s announcement of an early general election back in the middle of November, the USDJPY currency pair has appreciated by approximately 2.5%. The rise has bolstered short positioning in yen futures, which continued in the week ending December 4th.

According to the weekly survey, net short positioning in the Japanese yen rose by 13% to 90,326 contracts – the highest level in the last five years. This has been in the face of traders adding to long Euro and Australian dollar positions. By value, the sentiment was increased by almost $2 billion to $13.8 billion short. This leaves the current ratio at 5.31 short sells for every 1 long yen position, an extreme measure.

Supportive of the heightened sentiment is the likely election of LDP frontman Shinzo Abe this Sunday. Abe has announced that, if elected, the Japanese government would likely embark on further monetary easing, including the potential for the government to buy foreign bonds. Planned measures also include a 2-3% inflation target for the country and further stimulative efforts by the Bank of Japan.

FX Effects

The report details point to extreme interest in shorting the yen for a second straight week and sparks the looming potential for a temporary correction in the currency – especially ahead of this Sunday’s lower house elections.

The notion is no more visible than in GBPJPY.

The cross currency has found resistance just below the 133.00 round figure, which has kept the pair under control for the better half of the last two weeks. A failure here would bolster the notion of a 129.73 support test in the near term. Technical oscillators are supportive of the notion – still alluding to an overbought market.

GBPJPYSource:  FXTrek Intellicharts