Flash Crash Fears Haunt Traders Ahead of 10-Day Japan Break

(Bloomberg) -- Japan’s retail investors have propelled their net long yen positions against the dollar to near a record ahead of the nation’s extended Golden Week holidays.

Margin traders’ net long yen positions were at 208,613 contracts as of April 23, near a record reached just last week, according to the latest data from the Tokyo Financial Exchange Inc. That’s worth $2.09 billion.

As local markets approach a 10-day break, everyone from traders to fund managers has been fretting about the potential for wild gyrations in the yen as liquidity in Asia thins considerably in the absence of bulk of the almost $400 billion daily turnover that Japan witnesses. That’s raised fears of a repeat of the flash crash seen during Tokyo’s New Year holidays.

“Memories of the January episode are the reason behind the increase in short dollar-yen positions, given also the wariness over U.S.-Japan trade talks,” said Yoshihiko Kobayashi, president of JFX Corp., a Tokyo-based margin trading firm.

Flash Crash Fears Haunt Traders Ahead of 10-Day Japan Break

The latest tally of net long yen positions is almost double the 113,097 on the day before the flash crash on Jan. 3, when the yen had jumped almost 4 percent against the dollar within minutes as thin liquidity and algorithmic programs intensified moves.

Japanese and U.S. negotiators began a second round of trade talks on Thursday, and Prime Minister Shinzo Abe plans to meet President Donald Trump in Washington on Friday. The Asian nation wants to head off any “currency clause” directed at the Japanese yen.

Margin FX day traders in Japan, also known as Mrs. Watanabe, have grown in recent years as the central bank expanded quantitative easing, spurring retail demand for high-yielding currencies. Speculators have occasionally sought to trigger off a chain reaction by buying the yen in times of low market liquidity in the hope of setting off stop-loss orders from margin traders.

While platforms such as those provided by the Tokyo Financial Exchange and Gaitame.com Co. will remain open during the Golden Week, the absence of most Japanese market participants would take out a large chunk from Asia’s daily turnover.

With the upcoming shutdown also covering events including the Federal Reserve’s policy meeting and the release of U.S. jobs data, the scope for volatility is making some traders nervous.

At the same time, retail investors’ long positions in high-yielding currencies such as the South African rand and the Turkish lira -- which played a part in the January crash -- remain elevated.

Flash Crash Fears Haunt Traders Ahead of 10-Day Japan Break

Their net long positions in the lira versus the yen totaled 291,888 as of April 23, higher than 256,416 on Jan. 2. That’s also more than 255,423 contracts on Aug. 9, the day before Turkey’s currency plunged to-a-then record low as a standoff with the U.S. threatened to send the nation into a full-blown financial crisis.

With these extended positions, “you’d have to think that the yen is susceptible to a big up-move during Golden Week from forced position liquidation were the lira to weaken significantly, or an amplified move lower were the U.S. dollar to strengthen significantly,’’ said Ray Attrill, head of foreign-exchange strategy at National Australia Bank Ltd. in Sydney.

The lira weakened against the dollar and the yen on Friday. Turkey’s central bank on Thursday dropped a commitment to deliver further monetary tightening if needed as it extended its interest-rate pause to seven months.

The yen has depreciated 1.8 percent against the greenback this year and was at 111.65 per dollar on Friday. The lira has lost almost 10 percent against Japan’s currency.

©2019 Bloomberg L.P.