Will the Japanese Yen continue to surge?

The Yen had been under sustained pressure for most of this year, but since making a low on July 10th, the currency has managed to claw back almost all its losses for the year, in just a few weeks. The move caught many by surprise and has traders wondering if they have missed out on the opportunity or if there is more to come.

There are many factors behind the move (or more precisely the speed of the move), but I’m not going to go into things like the policy change of the BOJ or the ‘carry trade unwind’ you may have read about. I want to focus on the data and the first thing I want to point out that might surprise you is that we’ve seen this before. So where better to start to plan for the moves ahead than to analyse what the market has done in the past.  

Heading into the summer of 2007, (left price chart below) the Japanese Yen had again been under significant pressure, and in a multi-year downtrend against the US Dollar. Speculative traders had become extremely bearish on the currency, with selling reaching new all-time highs twice through the year. 

 

We know this because the selling positions were recorded in the Commitments of traders’ and in the bottom graph on the left chart above, we can see the red line (shows number of short contracts) crossing the 200k line twice in 2007, marking the first times in the markets history sellers had such a large position. 

Fast forward to 2024 and the price chart on the right above, and we can again see that the Yen had been under sustained pressure, with sellers again having twice crossed the 200k, as we can see from the red line in the bottom graph. 2007 and 2024 are the only times in this currency’s history that have seen the bearish positioning of sellers cross 200k contracts.  

This might not sound bullish, but the problem with building such a large one sided short position is that the market eventually runs out of people to sell to and as soon as one starts to get nervous (due to policy changes for example) or to take profit, all sellers head for the exit door and this leads to price accelerating aggressively to the upside, just like we saw in July. 

And of course lets not forget the commercial hedgers in the market. These traders plan for the future and we can see from the green line (long contracts) on both the middle graphs on the chart above, that they had built their largest long positions in 2007 and 2024 respectively. The only times they have crossed over 250k long contracts. This tells us they believed the Yen had become undervalued and they expected it to to move higher.  

Something else that is very interesting about both moves is their timing. In 2007, JPY made a low on June 14th, in 2024 it was July 1st, racing higher 11% and 13% respectively by early August. This period is historically very strong for the Yen anyway, so not a surprise to those who follow seasonal market movement in this way. However, the chart below showing the market movement for the entirety of 2007 (blue line) and 2024 so far (yellow line), shows that not only did the Yen spike higher at the same time over the summer, but they have followed the same pattern for the whole year leading up to the spike.

 

Trading activity, as we can see from the COT report, following virtually the same pattern in both years is unusual in its own but a markets price also following the same pattern, makes this very unusual indeed.

First off, I will say that it’s not fair to just assume that because we have followed the same price pattern so far this year that we will continue to do so for the rest of the year but of course we can see the pattern followed in 2007 so this will be a good reference point for me in my planning, and that planning right now is for a much stronger Yen. But to increase the chances of the Yen following this pattern again, I will also be watching the commitments of traders’ data very closely in the coming weeks to see if that too follows the same pattern for the rest of the year. If so, this will significantly strengthen the case for the price pattern continuing as expected. 
 

Following the initial move higher in July and August in 2007, JPY stalled for a few weeks before continuing its rally through until March the following year. As we can see from the price chart above, current price is effectively within the same range experienced during the pause in 2007 before continuing the uptrend, leading to a total gain of nearly 30% over that time. It didn’t stop there either, but did see a significant retracement thereafter.

Its also worth noting that the Japanese Yen is not the only market that is following an eerily similar path to 2007, but I’m not going to be all doom and gloom, as we all know what happened in 2008. At this point I am not expecting a 2008 like event but nonetheless, this data is something I am very glad I am aware off because it will help me to decide what I do with my money over the coming months. I will continue to follow the data and not the headlines, I recommend you do the same.

 

Happy trading

Ray Gilmour
Founder & Senior analyst at Markets Made Clear.com