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  • Financial Futures Association of Japan has  warned of market instability as the holidays create a liquidity vacuum.
  • Importers are probably leaving orders to buy dollars in case of a plunge during the holidays.

In a Bloomberg report, we are reminded that as Japan enters a six-day New Year break, “a sense of anxiety over the possibility of another flash crash is gripping currency traders,” which could spell trouble for the FX space and the yen.

Key notes  

  • The Financial Futures Association of Japan has already warned of market instability as the holidays create a liquidity vacuum. Meanwhile, importers are preparing to deal with a potential repeat of the turmoil that took place on Jan. 3 this year, when the yen gyrated wildly and surged against its peers.
  • Retail traders take a contrarian view and go into the market when prices dip, typically having a moderating effect on currency moves, according to research from Japan’s central bank. But when their bets go wrong, the results can be dramatic.
  • That’s what happened in the early hours of Thursday, Jan. 3, when the sell-off in the lira and the Australian dollar against the yen triggered an automatic liquidation of investors’ loss-making positions. Algorithmic programs and the absence of Japanese banks only exacerbated currency moves as the yen soared almost 8% against the Aussie and 10% versus the lira within minutes.
  • With banks being shut from Tuesday until Jan. 5, investors may not be able to respond to margin calls and risk seeing forced liquidation, the Financial Futures Association warned in a statement this month.

FX implications

The article, however, goes on to give good reasons why we may not see a repeat this year. Quoting  Tohru Sasaki, head of Japan markets research at JPMorgan Chase & Co. in Tokyo, the article wrote:  

  • “Since the yen became one of the weakest currencies this month, it is reasonable to expect it to rebound next month.”
  • “However, we don’t expect a flash crash repeat in the dollar-yen during this week even with Japan on holiday.”

The article also highlighted one reason for such a view taking into account the positioning: “Net yen short positions held by hedge funds are about 80% lower than they were at the start of 2019, according to data from the Commodity Futures Trading Commission.”

Also, the article explained that importers are probably leaving orders to buy dollars in case of a plunge during the holidays, according to Resona Bank Ltd. “We have seen dollar buy orders gathering around 105 yen to 107 yen,” said Keiichi Iguchi, a client manager at Resona in Tokyo. “We can’t rule out risks of a slide in dollar-yen, but it’s unlikely that we will see moves like Jan. 3.”

In addition to the holidays, we should not forget that a phase one deal is slated to be signed between US and Chinese officials very soon with he recent news that a Chinse delegation is flying to Washington this weekend to sign the deal at a signing ceremony. More on that here.