Dow Drops 300 Points, How Did Carry Traders React?

The Dow dropped over 370 points today and even though some currencies behaved the way that FX traders have become accustomed to when there is a big sell-off in stocks, some didn’t.

With risk aversion sweeping across the markets, the dollar rallied against every major currency including the Japanese Yen. Typically, USDJPY falls in lockstep with all of the other yen crosses, but today, it barely budged. We believe that the resilience of USDJPY is tied to positioning. According to the latest Commitment of Traders report, everyone who wants to be short USDJPY already is. Yen long positions are at extreme levels suggesting that there are no more sellers left in the market. Also we are nearing potential intervention levels by the Bank of Japan. The 105 price level is suspected to be the first line in the sand. In the second half of the US trading session, USDJPY rallied 30 pips in a blink of an eye (it quickly reversed those losses) and as tempting as it may be to label this rally BoJ intervention, it isn’t. The last time that the BoJ intervened was in March 2004 and for those traders who have lived through BoJ intervention, we would have to see a 100 to 150 pip move in a matter of seconds to consider calling it intervention. Yet caution is warranted at current levels because as USDJPY falls closer to 105 and below, the risk of intervention will grow exponentially.