Yesterday was a big day for USD/JPY that broke the sneeze fest. It is time to cover the big move as yesterday’s post finished with a lot of ifs due to the fact that a lot depended on the big news of day, which all market participants were waiting for.
As already mentioned in my last post, the pair was range bound this week waiting for the big news - the US CPI number for July 2022. CPI, which stands for Consumer price index, is the monthly inflation gauge that shows the percentage change in prices compared to the same month last year. The reason the comparison is done to one year before is because that way seasonal factors are taken out of play. If you want to read up more on CPI, you can do so here. So, the inflation number came at 8.5% annual increase, which is less than the number last month - 9.1%. This number itself has no significance - it is still quite a big increase compared to last year, but was definitely lower than what markets expected. Many were waiting for more signs of heating inflation, but the lower than last month number convinced the market participants (at least for the time being) that inflation is somewhat under control and so the FED would not need to raise interest rates aggressively next quarter.
Now back to the topic of the Japanese yen and what this CPI number means for it. As discussed yesterday, the JPY and most other currencies have been weakening against the USD due to expectations for increase in the interest rate differentials between the US and other countries. However, after yesterday’s CPI reading markets quickly put up bets that the interest rate differential will not be growing (or at least not as fast as initially speculated), which resulted in weakening of the USD and strengthening of the yen. We were around 135 for most of the week, but as soon as the CPI number was released all the shorts ran for the exits and the yen strengthened all the way to under 133 in minutes. That is a huge and very rare move of over 200 pips in a short time, which indicates a sudden appearance of buy yen orders, which crushed the sell orders and activated a bunch of stop losses. A stop loss is when a market player exits a position automatically at a certain level.
It also appears that some margin calls also occurred and there was forced liquidation of positions not backed by enough capital. That is usually what happens with retail traders, who trade on margin. They can make a lot of money from a move of 200 pips with their borrowed money, but when the market moves against them, they could lose all the capital in their account due to poor risk management. I have explained this dynamic of retail forex trading a little in this post.
Actually, now that I think about it, this huge move of 200 pips is telling me that the market is quite thin at the moment. This means that perhaps institutional players have stepped out, or at least have put their positions at the bigger levels such as 130 and 140. In the range between 130 and 140 we most probably have retail traders, who are looking for ways to score 100-200 pips and hopefully double their money in a best case scenario. Or in the worst case scenario lose it all.
In the next post I will discuss retail trading and how one needs to execute risk management in FX trading in general. Japan in particular has its famous Mrs. Watanabe - the Japanese housewife, who has been promised easy passive income by the numerous FX trading ads in Japan. Well, Mrs. Watanabe sure lost some money yesterday, as she is known to go short the yen and long higher yielding currencies such as the USD. To be discussed in more detail tomorrow.