Positioning In GBP/JPY Has Been Extreme

Although Macro Man didn’t ouch on it yesterday, his “no frills” earnings model for Goldman Sachs (GS) once again proved its worth, as the “consensus plus a buck” methodology proved to be deadly accurate. Why pay analysts a couple million bucks a year when the no frills model does so well?

In any event, given that someone had whispered $6/share yesterday, and that Citi’s (C) report were less than stellar, stocks generally traded on the back foot. Nothing that IBM (IBM) and Google (GOOG) couldn’t rememdy afte the close, of course, and SPX futures have made a new high for the year in this morning’s trade.

The real story, however, is in oil, which has finally broken out of four or five months of consolidation.

Yesterday’s bullish inventory data was met with a bullish response, which probably means that the trend is…err….bullish. $85 forecasts are now a dime a dozen; while another 10%-15% on the oil price may seem a bit too obvious, the set-up is not unlike the SPX price action in July.

Perhaps spurred by the oil price, some of the widely-populated front-end rate contracts have come under a bit of pressure, as indeed have some of the oil-importing Asian currencies. Indeed, despite the spike in crude, the dollar has felt decidedly squeezy for the last 24 hours; remarkable comments like Trichet’s “the euro wasn’t intended as a reserve currency” just added to the “fun”.

So Macro Man is left wondering whether these jitters are merely the occupational hazard of the occasional market fright, a to-be-expected round of Friday profit taking after remunerative week, or a warnings sign that flamingo hunting season has started.

In truth, there’s probably an element of all three. Macro Man has already pointed out the emergence of a distribution phase in the Kospi, which is certainly consistent with profit-taking. For markets to climb a wall of worry (or tumble down the elevator shaft of complacency) necessarily entails the odd bout of nerves.

But without a doubt, there is the odd flamingo or two that have been passed. Exhibit A is GBP/JPY, which reversed sharply after a seemingly inexorable decline over the past couple of months. The timing seems odd from a fundamental perspective, given that this week saw one of the few CPI prints of the year that didn’t surprise to the upside.

Ah, but when it’s flamingo season, positioning is the only thing that matters! And positioning in GBP/JPY has been…ahem…extreme. The CTA model community, as proxied by IMM positioning, has its largest short GBP/JPY position ever. (The chart below only goes back to 2004, but would look the same if taken back to 1992.)

Anecdotal surveys on real money and discretionary hedge fund positioning appear to confirm that this was a big ‘un.

The risk, of course, is that if the damage exacted by this cross proves sufficiently large, it could start to encourage profit-taking in other widely-held positions…the classic passing of the pink flamingo.

At this juncture, however, it might be a little premature that that will necessarily ensue. But Macro Man plans to keep and eye on whether this development is just a Friday jitter, an orthodox market right, or a prelude to flamingo season.

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