The Problem with a “One Way Market”

Well, you know the problem right? When it stops going one way…


(USD/JPY up until May 2013)

This maybe the case for the beloved USD/JPY. As you all know, the USD/JPY has been the “go to” trade in the FX market. Burn some JPY and you will make some money! It’s easy, even Marketwatch told us on Monday how easy it is!

Fact of the matter, is when the market is too lopsided in a trade, things tend to go wrong. As you can see below, the night before a BOJ meeting the USD/JPY is now threatening a big breakdown (or long breakout for the JPY).


(USD/JPY today with possible close below daily trend line)

As a FX trader, there are a ton of repercussions. Unfortunately, the USD/JPY rally has fueled a huge debate on how bullish the USD is. And, I hate to say it but a lot of the USD rally against most major currencies have been as a result of the massive move in the USD/JPY. I can give you several (but not all arguing points):

  1. We are going to “Taper”
  2. FIFO – We were first  to QE, first one out
  3. EUR area unemployment is high, productivity still low, retail sales, PMI’s, etc.
  4. US will be energy independent!
  5. US economy is resilient, more than anyone else!
  6. PM Abe and the BOJ has employed a massive amount of monetary easy squeezy!
  7. yadda yadda yadda…

The list goes on an on, and frankly I am on board with all the arguments. The problem is the market is broadly on board too and has bought into many (if not all) of those arguing points, and unfortunately the USD is not "participating." And now the USD is in a very precarious position where we could realistically see a massive USD liquidation just on a pure positioning standpoint. Not a lot of traders think the EUR/USD can go higher, or will go higher. But most of you know that the market likes to “impose as much damage as possible on as many participants as possible.”


(EUR/USD closes in on breakout point, so where does it leave the USD - UUP?)

So, what does that mean for equities? Well, here is the other issue: Stocks have risen partly due to the unprecedented easy money policy in Japan. You can argue with me on that if you wish, but I attribute a lot of the last 4-6 months of the current US equity market rally due to monetary policies of Japan. What happens if the market loses faith in the BOJ and PM Abe’s policies? I’m not sure, but the USD/JPY seems like it is showing us it may have.


(Equties, USD and USD/JPY up until May 2013)

My fear is at this point is tonight, the BOJ once again underwhelms the market, the JPY strengthens and the Nikkei, US equity markets AND the USD falls.


(USD/JPY and SPY correlation)

Traders have been saying that the USD and equity markets are correlated. However, I think the JPY and equities are inversely correlated, and the USD is just an innocent bystander of a “one way market.”


Blake Morrow

Chief Currency Strategist, Wizetrade


Follow me on Twitter or StockTwits @pipczar

Disclaimer: I started entering USD short positions today, and in the next 24 hours will make a decision to exit or add. Market will decide, not me.

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