Hedge Funds At Their Most Bullish In History!

On April 22nd, I posted this blog about the currency strength meter, and how it shows the Japanese Yen being one of the strongest currencies but on the verge of a potential reversal.

Well, we have now had a little kicker, the Bank of Japan held interest rates in the early Asia trading session. Now this wasn't necessarily a surprise to the markets. But the comments that followed from the Bank of Japan Governor were.

Most analysts were expecting a hawkish tone from the Japanese central bank leader as Tokyo Core CPI y/y rose to its highest level since April 2023 at 3.4%. This beat expectations of 3.2% and the previous reading of 2.4% increase in March.

Instead, the central bank governor spoke of the risks to inflation if tariffs were higher than the current base of 10%. Not only that but the overall global economic slowdown appears to be on the minds too.

Let's think about this a little, the market is expecting the BoJ to hike rates in July, but now concerns over global economic slowdown could stop inflation in its tracks.

This means that the BoJ is less likely to hike interest rates, unless tariffs get back to lower levels, and have little to no effect on inflation going forward. So inflation data out of Japan is now the macro data to watch.

After the announcement the, JPY did weaken ever so slightly, but it wasn't until the US session came around that the JPY weakness compounded.

To me, this wasn't a complete surprise as we pointed out in the previous analysis.

First, we pointed out the JPY futures market and the commitment of trader reports, these showed us that hedge funds had reached a long position that hasn't been seen in the history of the reports. What made us stand up and look at was the level the price of JPY futures had reached. They are trading up at the December 2023 and September 2024 highs, the last time the price reached these levels they sold off aggressively. This isn't to say that this will be the same case this time, but we are at similar levels, with a higher extreme.

Next, we can move on to the currency strength meter. The Japanese Yen had held as one of the strongest currencies for the past few weeks alongside the Swiss Franc. When the currency is at +5 or above for a substantial amount of time, we often see a reversal form. That started to break last week when the currency went from a +5 reading to a -1 reading, showing signs of weakness across the G7 currencies.

Finally, we had a slight macro shift, all be it early days, and data will still need to back up the idea of the BoJ not hiking rates, the tone from the central bank wasn't one that a JPY bull would want to see.

Combining all this together you can see that this week the JPY reversal was one to watch and look out for. Now we don't know what the market is going to do, all we can do is stack the probabilities together.

Taking a look at USD/JPY which is the inverse to the JPY futures chart, we can see the weekly chart is making lower lows and lower highs, so we are in a secondary phase on a weekly downward trend. If this continues we could expect the price to go and potentially retest the lows or even the previous highs around 148.00 - 149.00.

So, traders this could be one to watch out for over the next couple of weeks.

Peace!