Dollar/yen was one of the strongest-performing major currency pairs last year and many hedge funds have been betting the trend will continue as the Fed cuts back its huge bond-buying programme and on expectations the Bank of Japan will provide even more stimulus this year.
But many traders were taken by surprise by the U.S. non-farm payrolls data, which showed a rise of 74,000, well short of the 196,000 analysts had expected.
My opinion: If the Fed continues to expand its balance sheet in light of the weak job numbers, then I would expect the assets in the shadow banking sector to maintain their value – the current ballast for the housing recovery. When the Fed tapers this will leave a hole in the shadow banking market that will need to be filled by other agents (ie. hedge funds); however, it sounds like hedge funds will focus on currency trading instead. I will be very interested to see how the Fed eases out of QE without shocking the housing market too heavily. Going to need very strong jobs numbers next month to warrant a taper imo.