Commitment of traders shows shorts in JPY at high levels. Losing as JPY strengthens

The following chart overlays the commitment of traders speculative position and the JPYUSD price action going back over the last year.

What you notice is in September/October 2016, the net speculative position was long JPY (solid line). The price of the JPYUSD was at a peak. The price of the JPY started to move lower and then tumble lower but the net position did not switch to short until the price was much lower (see red horizontal line). Traders were slow to react. The speculative positions lost money.

What has happened recently?

Last week, the net speculative positions reached a new record short (over the last year at least). The net shorts are at -112K JPY. What has the value of the JPY done of late? Well since bottoming on July 11th, the price of the JPY has gotten stronger - against the traders speculative position.

So shorts in JPY are getting bigger while the JPY price is moving higher (the USDJPY is moving lower). Traders are losing with a record speculative position. That is not good.

What does that mean going forward?

We know that the USDJPY (and JPYUSD) is sitting on a key technical fence. The price is trading around the 100 and 200 day MA and the 50% retracement of the move up from the June low (see chart below).

With the BOJ on tap tonight and knowing shorts are near record levels, the potential exists that the shorts could get squeezed further should there be positive comments and the price tumbles away from the cluster of technical levels (between 111.637 and 111.846). Nothing hurts more like losing money and the USDJPY going lower is not good for record shorts in the JPY.

Alternatively, if the BOJ comments help to send the USDJPY back higher (the JPY lower), the short in the JPY may get their "Get out of jail free" card. However, there may be a lid on where the price can go, as shorts take advantage of the higher USDJPY (lower JPY) and reduce some of their position. Why? Because the net position is already high. Therefore, it is less likely the specs add as a result.

So the price risk in the USDJPY should be more to the downside as a result the net speculative position. Be aware of the dynamic.