I am writing this before the release of the big unemployment report this morning, so there is good chance that this is all going to be a moot point in a couple of hours. But I am going to put it out there anyhow because regardless of this morning’s noise, I think the US dollar rally is getting really tired, and is due for a pull back.

Yesterday the US dollar pushed to new highs after breaking out cleanly to the upside the previous day. But yesterday’s move higher was rejected, and we ended up sliding back down to the breakout level. I think this has the possibility of being a classic “pop and drop.” This pattern is comprised of a pop higher that lacks follow through, and it quickly drops back into the range. The move into new highs ends up not being nearly as stable as the bulls anticipated, and the foundation crumbles underneath them.

But let’s not kid ourselves. From a purely technical perspective, I am reaching. Although yesterday wasn’t the cleanest action out there, the trend is clearly higher.

But then again, at this point the US dollar bull trend is so well established, we have to ask ourselves; who isn’t long US dollars? Who is left to buy? Have a look at the total speculative positioning of the notional value of the sum of the various CME currency contracts versus the US dollar.

This trade is one of the most crowded trades out there. Now that doesn’t mean it has to end. In fact, during the really big moves, the specs often get positioned right and hang on for a long time. There is a chance that this is one of those cases where over thinking is only going to cause a world of hurt.

Yet if you are going to be trading the US dollar from the long side, make sure what you understand what you are betting on.

The US dollar bulls are assuming that the Fed’s recent withdrawal of liquidity and the backing up of US short rates, while the rest of the world collapses in a deflationary slump, will continue. They are assuming that US economy will prove immune to this recent economic cold that the rest of the world seems to have caught.

The US economy does indeed seem to have decoupled from the world economy. But how realistic is for this trend to continue?

How long can the US chug higher while everyone else struggles to keep their head above water?

And more importantly, if either the US economy slumps, or if the rest of the world shakes their economic cold, then what is going to happen to the crowded US dollar long trade?

I am always on the lookout for where the next surprise is going to come from, and in my opinion, the long US dollar trade has the potential for a sharp reversal that catches many off guard.

I think the Japanese Yen is especially vulnerable. Yes, I know all the reasons why it has to keep going down. Abe keeps polling well, the economy is still not showing any real signs of sustainable inflation, the BoJ is the most expansionary Central Bank out there, yada yada yada… But don’t forget that currency levels are also influenced by political factors. I still contend that the last thing that Abe & Co. want is for the Yen to accelerate to the downside.

At this point we finally ticked at the 120 USDJPY big figure. I don’t believe that the Japanese want it to weaken much past this level, and I fully expect them to signal their intention to stop the decline shortly. Now they might let it go through 120 and let the speculators get really out over their skis before pushing it back, but I am expecting the Yen weakness to at the very least decelerate, and more likely, reverse in the coming weeks.

When the Abe embarked on his expansionary mad science experiment, the Yen was uniformly acknowledged to be overvalued. Today the Yen is more than 50% cheaper than from the start of Abecnomics, and is actually undervalued on a purchasing power parity basis.

At this point, further weakness has the potential of spinning out of control and doing more harm than good. I think the Japanese are going to want to get a hold of this decline and pause it.

During the last month, we have moved from 105 to 120 with barely a pause. It is time for a break.

I don’t have any real solid logic to hang my hat on in terms of timing, but I have noticed some wise old veterans quietly exiting the short Yen trade. There are also some new research reports that are highlighting the risk of the Yen spiralling out of control to the downside. SocGen recently published a report that postulated that 123 Yen was the level that would result in the Yen weakness causing more harm than good, and potentially accelerating the decline. I don’t have a clue how they can be so precise, but I do agree that in a general sense, we have hit a point where enough is enough. Abe understands the deflation that he has unleashed on the rest of the world, and no doubt heard an earful at the recent G20.

At this point, speculators that push the Yen lower are counting on the decline getting disorderly. There is a lot of talk about it falling to 130 or 140 Yen in a blink of an eye. When everyone is talking about it going one direction, it makes sense to start looking the other way.

Don’t get me wrong – I understand the risks of the Yen slide accelerating downward are not negligible. Therefore I would never outright buy Yen. But I have started nibbling on some Yen calls (in CME currency terms). I think the chance for a sharp move the other way is worth the punt. It is a pretty lonely call, and I stand a real good chance of looking like more of an idiot than usual, but I think it is time to take a flier on the Yen trend reversing.