Currency traders have had veritable months to mull the widening interest rate differential between Japan (where interest rates have remained effectively negative for several years) and the rest of the developed world. Accordingly, many traders have turned to technical analysis in order to gauge sentiment surrounding the Yen. The consensus, which is supported by data, indicates the Yen has been heavily sold short, as institutional and retail investors, alike, have bet against the Japanese currency. While this might suggest the Yen is due to fall, many analysts have reached the opposite conclusion. Basically, many retail investors have leveraged their positions to the degree that any Yen appreciation would force them to quickly buy Yen to cover their positions, resulting in a so-called “short squeeze.” If thousands of traders bought to cover en masse, this would likely feed back into the Yen causing an even larger appreciation. The Financial Times reports:

Trader data released on Friday showed a huge jump in short-yen positions to 43,126 in the week ending January 31, from just 8,839 a week earlier. This would have provided significant fuel for a yen bounce once an initial move higher had been made.

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