Short exposure rises ahead of 'Abe's' election (rightly or wrongly)

Short interest for the Japanese Yen has picked up in recent weeks for two primary reasons; economic data is rising; Prime Minister Abe appears to be back in the driving seat for this weekend’s election.

As large-scale quantative easing is one of the pillars to Abenomics, traders have even less reason to expect any sudden policy changes from the Bank of Japan (such as tapering) if he is re-elected. As Japan is one of the few economies to weaken with positive data and quantative easing weakens a currency, gross short positioning has now risen to three month highs.

The speculative positioning data is provided by CFTC on a weekly basis, so better serves as a guide to general sentiment for higher timeframes. But today we want to highlight that price action on the daily Yen futures chart is of particular interest due to its shallow pullback following a directional move lower. If we are to see prices break lower, we can assume broad Yen weakness which would then be supportive of crosses such as USDJPY, AUDJPY, EURJPY etc.

Fall from Grace:

On the 7th September, JPY broke to a five month high by the close of trade. Yet the sharp reversal lower on the following session quickly saw sentiment shift in favour of the bears, who remained in firm control for the best part of September. Whilst support has since been found at 0.8828 we note the shallow retracement from this low could be part of a bear flag. A break lower of the flag would be of technical interest as it assumes a continuation of the bearish trend, although we also note support nearby.

Rising support a pivotal area:

Support has since been found at 0.8828 which marked the September low, which also confirmed a third touch of a rising support level from March. We do not consider its trajectory bullish enough to label it a trendline but, whilst it remains unbroken, is considered a worthy level of support. This makes the area pivotal over the coming week/s as it could mark celebration or embarrassment for bears depending on how prices react around it.

Of course, elections can and do throw surprises where results are concerned, which leaves the Yen vulnerable to a bounce higher if Abe were to lose or economic data were to sour. This is why we will steer of JPY crosses leading up to the elections and assess the technical landscape from Monday onwards.

We should add at this point that we are using Yen futures as a proxy of broad Yen strength of weakness, so that is not to say individual JPY crosses cannot break to new highs or lows without the Futures breaking its relevant swing. But if we are to see Yen futures break support, it adds further weight to the moves of individual crosses as part of our overall analysis.