Date
26 May 2017
The yen rally caught most people by surprise as it came amid Japan's negative interest rate policy. Photo: Bloomberg
The yen rally caught most people by surprise as it came amid Japan's negative interest rate policy. Photo: Bloomberg

Avoid the most crowded trade, or embrace it?

The Japanese yen’s strong rally has become a heated topic in financial circles.

The chief economist of the Hong Kong Economic Journal has described long positions on yen as the most crowded trade, warning investors against rushing into the currency at the current level.

My take on this issue, however, is this: it’s not easy to quantify a trade as being too crowded. At what level does something qualify for that status?

When the yen was weakening previously and hit lows like 121 yen against the US dollar, most observers believed the currency can only go down more as the Bank of Japan embarked on negative interest rate policy to kick-start the economy.

Buying yen at that time was obviously not a crowded trade.

Soon, the currency however began bouncing back.

People started calling long yen positions a crowded trade when the US dollar eased to 116 yen. The greenback went on to hit as low as 107 before a modest recovery over the past few days.

Thinking it’s crowded enough, I shorted yen when the dollar changed hands at around 116 yen. Now, you can imagine what happened to me.

Be it currency or stocks or other investments, an overbought market can become even more overbought. The same goes for the other way.

Determining when a trade becomes overdone is often extremely hard. So, advice on avoiding crowded trades may not always work.

The article appeared in the Hong Kong Economic Journal on April 15.

Translation by Raymond Tsoi

[Chinese version 中文版]

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RC

Columnist at the Hong Kong Economic Journal

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