As investors begin rethinking the tightening of monetary policy trade that has been so supportive of the like if USD, GBP and CAD the Japanese Yen has found support. The stubbornly low inflation outlook in the U.S, coupled with fragile growth in both the U.K and Canada has forced traders to abandon the central bank divergence play that has kept JPY weak for the best part of 2017.

Furthermore, it appears the BOJ is considering the possibility of adjusting their yield curve control in 2018, making that divergence trade even less attractive. If we consider this scenario with the excessively short positioning of the JPY, there is an argument that JPY could be in the early stages of strength based on rotation.

With the market heavily short JPY as the ground shifts in terms of fundamental drivers, I feel there is scope for an unwind of these positions that would catch the market off guard in what could be one of the big ‘pain trades’ in the coming months.

JPY Positioing is extremely short

JPY

 

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