Comments from Kuroda were the flashpoint but not the whole story
Here is the exact comment from Kuroda that kicked off a two cent drop in USD/JPY to 122.46 from 124.50.
"The yen is unlikely to weaken further in real effective terms if you think with common sense, given how far it has come," Kuroda said in parliament Wednesday.
Since the USD/JPY breakout in late May, I warned that the main risk to the rally was a comment from a Japanese official lamenting yen weakness. Even before the breakout, there were signs that top policymakers weren't in a hurry to weaken the yen and with blockbuster Q1 growth, there was even less urgency.
So the comment is definitely the #1 reason for yen weakness but it's not the only one.
2) Positioning in USD/JPY
If you look at the CFTC data, it's not necessarily that yen shorts were crowded. They're back to levels where the were throughout Q4 of 2014. But it's the swiftness of the move that's the warning sign. Net shorts rose to 85K from 20K in two weeks; and the trade probably got even more crowded after non-farm payrolls.
The timing of those moves puts most of the trades underwater at these levels and that's why there has been such a rush to the exits.
In the rallies late last year in USD/JPY, the speculative market had a much larger buffer. When the inevitable hiccups came, they were surprisingly steady. I mistakenly thought they would be strong again but that wasn't the case today.
What might have added to that is the change in the overall US dollar tone. Dollar bulls aren't the confident bunch they were a few months ago as the bond market is turned upside down.
Technical analysis: What to do next in USD/JPY
Fundamentally, this isn't a game changer. Kuroda isn't the first Japanese official to say that around 122/125 is a comfortable level for the yen. It's not like there was a threat of intervention here. And Amari tried to undo the damage almost immediately.
You have to ask yourself if Kuroda's comments are a game changer. My answer is no.
So it's a technical trade and a retracement back to retest an old range is a classic stage in a breakout.
