Market reaction to Snow shows extreme yen position

[HenryTo]

FYI:
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Market reaction to Snow shows extreme yen position

12/4/2005

NEW YORK, Dec 3 (Reuters): Volatile movements in the yen yesterday sparked by comments from U.S. Treasury Secretary John Snow underscore just how nervous traders are with their own extreme bets against the Japanese currency.

The yen surged broadly after Snow suggested in a Reuters Television interview that the weakening yen would be a subject of discussion at this weekend's meeting of the Group of Seven largest industrialised nations.

The dollar fell by a full yen in 20 minutes after the headline to an intraday low of 120.21 yen. In the last two sessions, the dollar has rocketed from 119.65 yen to 121.22 yen, its highest since March 2003.

The Treasury Department then issued a statement saying Snow did not make any specific mention of the yen and had no comment on the currency's value.

The market's knee-jerk reaction to buy yen wholesale on a single headline reveals how extreme positioning has become with regard to bets against the yen. Traders are clearly wary of holding such large positions and are poised to cover them at any moment.

"The market is starting to get extremely sensitive to stories like this," said Ian Stannard, currency strategist at BNP Paribas in London.
Marc Chandler, chief global currency strategist with Brown Brothers Harriman in New York, agreed.

Short positions in the foreign exchange market are essentially bets a currency will decline. Speculators in the Chicago futures market in the week ending Nov. 22 had a net short yen position of 65,884 contracts, second in sise only to the prior week's record net short base of 67,231 contracts, according to data from the International Monetary Market.
The yen has suffered this year as the Bank of Japan has maintained its zero interest rate policy while other monetary authorities, most notably the U.S. Federal Reserve, have raised rates. That makes the yen a cheap funding currency for "carry trades", where dealers borrow one currency at cheap rates and invest in higher-yielding currencies.

In an environment of persistent yen weakness this year-the dollar is up 18 per cent against the yen year-to-date.

Japanese investors buying foreign assets in large amounts have been leaving their exposure to foreign currencies largely not hedged.
Meanwhile, foreigners buying Japanese stocks are hedging their exposure to the falling yen, said Brian Rose, currency strategist at Bank of Tokyo Mitsubishi.

All this leaves the investment community effectively well short of yen, and vulnerable to any sign of a turnaround.