Japanese Yen Futures Volatility Forecast (13/06/2011)

The last week we were expecting a further rise of Japanese Yen futures and effectively so it was in the first half but in the second one a sharp retracement annulled all the returns accrued on the long side.

Particularly, the market opened at 124.8 rose to 125.1 on Wednesday but it dropped to 124.5 on Thursday whilst 124.5 was the last price print registered on Friday.

The actual volatility is 0.53% (8.4% annualised) and the TGARCH curve is evidently showing a downward sloping curve which highlights that the mean reverting process of the conditional variance has not been altered by the market drop and it is likely to end its movement in the upcoming hours.

Substantially, the symmetric movement of the volatility and the price action is a warning signal and the slope of the curve is a very evident indication that the short term drop of Japanese Yen futures has been caused by an appreciating US dollar and plummeting equity indices.

The HyperVolatility team remains bullish on this market because the volatility did not react at all to the plunge in the price action meaning that many investors did not get rid of their long positions. Hence, the conditional variance should touch 0.48% – 0.5% (7.6% – 7.9% in annual terms) whilst futures prices are likely to retest the 125.5 – 126 area by the end of the next week.

However, an increasing market fluctuations rate and a failure to break through the 125 threshold will probably keep us outside of the market.

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