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Japanese Yen Futures Volatility Forecast (08/08/2011)

The sharp drop that equity markets experienced over the last 10 days forced many investors to buy Japanese Yen futures which opened at 129.5 on Monday, rose to 129.8 on Tuesday, remained at this level on Wednesday, dropped to 126.5 on Thursday and closed at 127.6 on Friday.

The current volatility is 0.68% (10.7% in annual terms) and the TGARCH plot is clearly displaying an upward sloping curve which seems to suggest that an ulterior increase in the conditional variance should be expected in the upcoming trading days.

The Bank of Japan intervened, by selling something like 4 trillion yen, in order to prevent its currency from appreciating too much and this caused the heavy drop we all saw on Thursday. In particular, many investors got scared about a default of US and tried to diversify their exposure to market risk by investing in safe havens which is precisely why we had a violent appreciation of the Japanese currency against the dollar.

The HyperVolatility team is bullish Japanese Yen futures because the US debt downgrading, the European debt concerns and the slow growth in the global economy will “motivate” many investors to keep their money in “safe assets”. Particularly, the volatility should start softening over the next trading days whilst the buy pressure should augment despite the desperate intervention of the Bank of Japan to prevent its national currency from a further sharp appreciation which would heavily affect their economy given the fact that Japan is primarily an exporting country.

Japanese Yen futures should retest the 130 level and eventually break through it by Friday. The price action could even touch 131 should the global economy provide ulterior signs of weakness.

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