Japan TFX margin traders ramp up bets against yen

* Biggest 1-day rise in net short yen positions on Jan. 26

* Day-to-day position swings become more extreme in Jan

* TFX on track for biggest monthly volume on record

* Short-term trading means bets vs yen may not persist

By Masayuki Kitano and Kaori Kaneko

TOKYO, Jan 29 (BestGrowthStock) – Japanese retail margin traders on
the Tokyo Financial Exchange (TFX) ramped up their bets against
the yen in January, in an unusual burst of activity accompanied
by sharp swings in their day-to-day positions.

Foreign exchange margin trading, which allows investors to
make large bets with relatively small amounts of money, has
boomed in the past few years as Japanese households, tired of
puny interest rates, look abroad for higher yields.

The Bank of Japan estimated in 2008 that margin traders may
have accounted for as much as a tenth of global yen spot
trading.

But these retail investors, often referred to using the
moniker “Mrs Watanabe”, the name of an archetypal Japanese
housewife, were scarred when the yen surged in 2008 as the
global financial crisis prompted investors to unwind risky carry
trades, which involve selling low-yielding currencies such as
the yen to invest in higher-yielding currencies and assets.

That spurred a shift towards short-term speculation and an
increase in margin trading volume, with the trend becoming even
more conspicuous this month.

January’s volume for all 23 currency pairs traded on TFX
reached the highest for a single month since the exchange began
offering margin trading in July 2005, and is roughly 60 percent
above the monthly average in 2009.

“Before the onset of the financial crisis, it seemed like
currency margin trading might become a vehicle for buy and hold
type investment in foreign currencies, and an alternative to
foreign currency (Read more about trading foreign currency. deposits or investment trusts,” said Masafumi
Yamamoto, chief FX strategist Japan for Barclays Capital.

“But in the wake of the sharp fluctuations that took place,
what seems to be happening instead is that it is attracting
people seeking short-term profits,” Yamamoto said.

Because margin traders tend to sell dollar/yen and cross/yen
on rallies and to buy on dips, the recent pick-up in their
activity could help curb overall market volatility, although
margin traders may also exacerbate market moves if their
stop-loss levels are hit, Yamamoto said.

On Jan. 26, TFX margin traders increased their combined net
long position in the dollar, euro, sterling, Australian dollar,
Swiss franc, Canadian dollar and the New Zealand dollar against
the yen to a 17-month high of 308,758 contracts, with about half
of that position being held in the Australian dollar.

The combined net long position jumped by more than 160,000
contracts that day, the biggest one-day shift in positions on
data going back to July 2006.

It also a marked sharp shift from just two weeks earlier,
when TFX margin traders had a combined net short position in
those seven currencies versus the yen of about 192,000 lots.

One contract is worth 10,000 units of the currency being
traded against the yen.

Margin trading in Japan is done via exchanges such as the
TFX and over-the-counter via individual margin brokers, with TFX
data watched closely to gauge overall trends.

Highlighting the unusual nature of that move is the fact
that one-day position shifts of more than 100,000 contracts
occurred only three times between July 2006 to December 2009.

But the jump on Jan. 26 was the third time in two weeks that
the size of net positions changed by that much.

One possibility is that a small number of retail investors
may be conducting more large-lot, short-term trades.

“There are a number of people who trade in sizes bigger than
interbank dealers like us. Activity by such people has been
high,” said the dealer for a major Japanese bank.

There were lots of good-sized flows from margin traders on
Jan. 26, right around when the yen fell after Standard and
Poor’s cut its outlook for Japan’s sovereign rating, the dealer
said, adding that a large single trade by margin traders can
easily exceed $100 million, with the number of such big trades
seeming to have increased in the past month.

“The market has changed a lot compared to before, when there
were many people trading 10 to 30 contracts,” the dealer said.

Stock Research

(Editing by Joseph Radford)

Japan TFX margin traders ramp up bets against yen