Guess Who Is Really Short Yen?

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Say you're a diligent currency investor and you pay close attention to weekly investor positioning reports. You probably think you're on top of just how big the short and long positions are in all the major currencies, right?

Guess again.

"Positioning indicators are fairly representative for most currencies. The yen is an exception, because almost all metrics are confined to foreigners," says George Saravelos, a currency strategist at Deutsche Bank . "This is a problem, because the lack of offshore participation in the Japanese asset base makes onshore investors the driving force behind medium-term trends. Foreigners can push the market around, but sustained moves can only be generated by the locals."

That could make it more than a little challenging to trade the yen on more than fluctuations in investor risk appetite - but Saravelos has another way to look at the currency.

He points out that the yen-dollar pair is closely correlated with yields on two-year Treasurys. And that correlation, in turn, tends to strengthen or weaken in tandem with increases or decreases in Japan's current account: the account tends to move lower, as it is doing now, when the yen-dollar pair is less closely correlated with Treasury rates, and so on. (This could be because when Japanese companies are exporting less, they are buying fewer dollars to hedge their exposure, Saravelos says.)

"You need portfolio outflows to resume for the yen to meaningfully weaken," Saravelos told me.

If you followed me so far, here's how Saravelos told me to read the ups and downs of the relationship between the Japanese current account and the dollar/yen-Treasury correlation. For now, he says, that correlation seems to have peaked. And that, he says, means a weaker yen lies ahead. "USD/JPY can rise, even if US rates stay close to zero."

Your move.

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