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USD/JPY weighed down by new margin requirements
By Sean Lee || July 26, 2010 at 21:42 GMT
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It seems that Japanese retail traders have much less confidence in their home currency than they should have. The first thing most do when opening their highly leveraged FX trading accounts is to buy USD/JPY. This is at least what a few of my Japanese trading friends have done and in fact some of them are long with average positions above 100, yet they persevere. As Jamie mentioned earlier, new margin requirements to be introduced next week are having the effect of forcing retail traders to reduce their mainly short JPY positions.
With 1.5 million retail trading accounts in Japan, this can amount to quite a lot of selling in pairs like USD/JPY.
I’m not even leveraged at this point, so it doesn’t affect me (I trade in Tokyo). But there is something wrong with law-making that changes the rules while the game is in progress. New positions? Sure. Make whatever law is reasonable, and some of the leverage that the FX market offers is insane, serving no useful social function at all unless separating fools from money is a useful social function.
But existing positions should *not* be required to liquidate simply because lawmakers (very belatedly) get around to curbing stupidity. Even though I’m not affected, I’m very unhappy about this. It points out how we are *all* at the mercy of forces beyond our control, and lawmakers can destroy even rational and prudent planning if they get some wild hair up their behinds.
I am doubtful that there are many positions with average buy prices above 100, but human foolishness is boundless, and after all, they were getting a pretty fat roll until recently, so perhaps a few went overboard. Still, regulators have no business passing what in essence is ex post facto regulation.
I am wondering if the rules will cause a sudden run on the Japanese banks as investors rush to top up their trading accounts with capital before the rules come into place… but I doubt it. I don’t think there can be that many super highly leveraged out of the money positions out there, but then we shall see!
I agree with you david. And I also think that the extremely leveraged positions would not likely be positions backed by large reserves of bank deposits collecting ~0.01 percent annually. (I think the roll may be worth more than Japanese bank interest.) Chances are these are fairly small, highly-geared players who are going to have to sell 1/2 their positions or more. I really would not expect it to have much of a market effect, but then real money may decide to hold these folks as far underwater as they can this week. Never give a sucker an even break, right?