The CurrencyShares Japanese Yen Trust (NYSEArca: FXY), which tracks yen movements against the dollar, is off 4% over the past month and was one of just eight exchange traded funds to print a 52-week low on Wednesday.
Over the same period, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) and the Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) have posted an average gain of 3.5%, which is to say the yen is weakening against the dollar. Even USD/JPY is the second-most heavily traded currency pair in the world, the yen’s recent bout of weakness, and strength in the aforementioned currency hedged ETFs, has caught some investors by surprise.
“The final step is for professionals to ignore the fact that the traditional yen correlations are not needed for yen to weaken. Put another way, many who are looking to get long on the USD/JPY have yet to do so because they can’t get over the fact that long-end US yields have not risenin tandem with the yen weakness.It is not in the DNA of the professional to embrace the yen weakness when there is a two-point rally in the US long bond following strong US data. In the absence of the ‘correlation confirmation’ many just sold euro in a measured way instead or remained sidelinedin yen strategies,” said Rareview Macro founder Neil Azous in a note out Wednesday.
Some professional traders and investors are licking their wounds regarding their lack of participation in the USD/JPY rally and ETF flows confirm as much. Frankly, the ProShares UltraShort Yen (NYSEArca: YCS), which tries to reflect the daily -2x or -200% daily return of the USD/JPY currency pair, deserves better than $117.4 million in year-to-date outflows. YCS is up 42% over the past year. [Dollar Winning Currency War]
Although the path of least resistance for the yen appears to be lower, long USD/JPY positions are dwindling.
“The ratio of long to short positions in the USDJPY stands at 1.08 as 52% of traders are long. Yesterday the ratio was 1.20; 55% of open positions were long. Long positions are 7.6% lower than yesterday and 33.8% below levels seen last week,” according to DailyFX.
Azous recently made a compelling case for USD/JPY running to the 128-130 range, which is well above the 123.8 area at which the pair currently resides. [The Case for Long Japan ETFs]
“It is near this point that these same professionals will simply say to themselves that the USD/JPY range of the 6-month rectangle going back to December 2014 was6.2 big figures, and if you add that number to the intra-day high of 122.03 back on March 10, 2015 you get to 128-130 pretty easily,” adds Azous. “And whatthat means is if you pay 125 and the target is 128, you can rationalize that internally.”
Some investors are expressing their bearish yen views with ETFs like DBJP and DXJ, which have hauled in over $4 billion in combined assets this year. In the current quarter, DXJ and DBJP have added $940.4 million and $221.4 million in new assets, respectively. [Investors Still Like Japan ETFs]
ProShares UltraShort Yen