BAML has reported record high bullish positions in the USD index recorded as of last Tuesday. Long contracts from investors on US rose to $42.6 billion from $40.8 the previous week, breaking multi year records. Despite being in a crowded bull market, the USD  declined today against major currencies, with the  USD/JPY hitting an unwelcome milestone.

The trigger for the frenzied sell off in U.S Dollar Index seems to be the unexpected contraction in US manufacturing data. May data from  Institute of Supply Management (ISM) showed that manufacturing activity fell from 50.7 percent in April to 49 percent in last month, missing economists’ expectations of 50 percent.

 USD/JPY

USD/JPY Falls Below ¥100, Record High Volatility

The sharp sell off in the USD index raised yen to below 100 against USD, a first since May 9. Dollar traded as low as USD/JPY 99.17 against USD, later strengthening 1.2 percent against USD. The weak ISM data also took a blow at US stocks initially, which have since recovered. The weakness in US growth, witnessed for the first time since June 2009, spooked investors worldwide. European, Japanese and emerging market stocks also took a hit.

Tonight’s trading would be particularly tense for Japan, where already the benchmark index has fallen multiple times in the past weeks. Today NIKKEI 225 (INDEXNIKKEI:NI225)’s volatility was highest since the infamous Fukushima nuclear plant disaster that took place almost a little more than two years ago. NIKKEI 225 (INDEXNIKKEI:NI225) has fallen 15 percent since touching the peak on May 23. Analysts expect further volatility in Japanese markets, and the USD/JPY below 100 certainly wont help.

Other EM Currencies

Meanwhile hedge funds slightly increased their shorts in JPY futures last week, from 99,890 to 103,555 short contracts of JPY12.5 million each. Australian dollar, another hot short, also strengthened 1.9 percent against the USD today. Short bets in AUD futures marginally increased in last week whereas funds exited long positions more aggressively. Swiss franc was up 1.4 percent against USD, while South African rand bagged the highest gains of 2.7 percent against the dollar today.

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The rally in these currencies may not sustain as the strength of USD, in the longer term, depends more on whether Fed will taper off QE or not. Whatever USD loses in the time leading up to Fed’s meeting on June 18-19 would be gained back if Fed decides to cut down on asset purchases.