USD/JPY forecast: Bullish exposure to yen hits record high - COT report

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Market positioning from the COT report – 25 February 2025:

Traders reduced their net-long exposure to USD by -$8.1 billion last week, their fastest weekly reduction since September
Asset managers also trimmed their net-long exposure to USD index futures for a sixth week
Net-long exposure to Japanese yen futures increased by 35.4k contracts to a record high among large speculators
Net-short exposure to EUR/USD futures fell to a 15-week low
Large speculator flipped to net-long exposure to GBP/USD futures for the first week in seven
Large speculators who continued to trim their net-short exposure to CAD and AUD futures were likely caught off guard by Trump’s decision to go ahead with tariffs
Gold futures saw managed funds and large speculators trim net-long exposure for a third week
Bullish exposure to metals was lower in general, with net-long exposure to silver, copper and platinum being reduced (and net-short exposure to palladium increased)
Bullish bets against Nasdaq futures rose to a 22-monthh high among asset managers, who also flipped net-short on Dow Jones futures

JPY/USD (Japanese yen futures) positioning – COT report:

Large speculators reached their most bullish exposure on record to Japanese yen futures last week.
The 35.4k week-over-week increase has now pushed net-long exposure to 96k contracts, over 25% from its prior peak set in 2016.
Asset managers increased their net-long exposure by 32.8k contracts, their most aggressive weekly increase since February 2020.
Although bullish exposure remains at a more modest 71.7k, a full 45% below its 2020 peak.
Net-long exposure rose for a sixth week across both sets of traders, while longs trend higher and shorts were reduced.

It could be argued that bullish exposure has reached a sentiment extreme, at least where large speculators are concerned. JPY futures remain relatively low compared to the bullishness of exposure, so prices need to rise against the US dollar quickly to justify their positioning, or those positions risk being closed and sending the Japanese yen lower (and USD/JPY higher).

My core theme for the year is for the Japanese yen to strengthen (lower USD/JPY), but that still leaves room for retracements. And we’re likely seeing a correction on USD/JPY now which could see bears return to send USD/JPY back below 149 in due course.

USD/JPY technical analysis

The weekly chart shows a small bullish divergence on the RSI (2) in the oversold zone, and a mild bounce occurred last week from the December low. A mild bullish divergence also formed on the daily RSI (14), though it had not reached oversold and remains below 50 to show negative momentum overall.

For now, the bias is for a move towards 152, near the February VPOC (volume point of control). I can then reassess its potential to continue higher over the near-term, or roll over in anticipation of a break beneath the December low.

Commodity FX (AUD, CAD, NZD) futures – COT report:

Trump’s decision to go ahead with tariffs after teasing Canada, Mexico and China with a month’s pause weighed on appetite for risk last week. And that helped send commodity FX pairs such as AUD/USD and NZD/USD lower and send USD/CAD higher.

This brings into doubt the ‘bullish divergences’ previously highlighted on AUD and CAD futures. Meanwhile, traders continued to short NZD futures on the prospects of further cuts after the RBNZ delivered their third successive 50bp cut in February.

I suspect AUD/USD and NZD/USD could remain under pressure this week and there could be future upside for USD/CAD at least over the near term. If there is any hopes that commodity FX won’t simply roll over, it is that they remain above levels when Trump originally delayed the tariffs.

Metals (gold, silver, copper) futures - COT report:

Momentum has finally turned against gold. I thought it might at least tag $3,000 before an inevitable shakeout, but bulls were more than happy to abandon ship $25 from the milestone level. Large speculators and managed funds were trimming their net-long exposure in the weeks ahead of the bearish engulfing candle we just saw on gold futures, and they have been lightening their load to metals in general – namely silver, copper and platinum.

I very much doubt this is ‘the’ top for gold, but a retracement would be nice. And as traders remain heavily net-long the precious metal, such a retracement could be seen as a gift with a discount.

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