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In: Finance, Forex

The Yen’s fall to a low that hasn’t been seen in over 5 years shows no signs of easing as rising commodity prices have deteriorated the outlook for Japan’s trade balance and put pressure on the currency’s haven status.

Japan posted its sixth straight monthly trade deficit in January, with the shortfall climbing to an eight-year high of 2.2 trillion yen ($18.7 billion dollars). The nation is a net importer of a long list of raw materials from crude oil and grains to metals, which exposes it to higher costs as sanctions imposed on Russia over its invasion of Ukraine have elevated the cost of these imports.

The currency has dropped against more than half of its peers in the past month even as the conflict in Ukraine set off a flight to safety among global investors. The yen typically benefits in times of risk, as investors flock to buy in order to safeguard against inflation affecting the major pairs, that is what makes the current decline of the yen that much surprising.

The Yen headed for a sixth straight day of losses on Monday, sliding as much as over half a percent to 118.06, the weakest level since January 2017. The yen is expected to drop a further 1% to 118.80 per dollar in the upcoming days. That would match one of its most significant lows set in December 2016. With the currency now falling to its lowest level against the U.S. dollar since January 2017, Ironically leveraged funds started cutting their net short yen positions at exactly the wrong time.

The Commodity Futures Trading Commision (CFTC) data show short-term funds have pared their net short yen positions for the last three weeks through March 8 by 21,375 contracts to 28,343. At the end of the first week of cutting their position, on February 22, dollar-yen was holding above support at its 100 Displaced Moving Average (DMA). While the reduction in shorts may keep the yen in a range between 110 and 116 per dollar until the Ukraine situation stabilizes, its long-term direction is down and it will probably test around 120 before the end of the year.

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