Japanese Yen Futures Volatility Forecast (10/05/2011)

The last week we signalled the 124.5 area as our profit target and indeed futures prices broke through that level. Additionally, we stated we would have closed our longs out if futures had surpassed the aforementioned threshold because the 125 resistance point was very unlikely to be violated and so it was!!!

The price opened at 123 rose to 124 and on Thursday tested the 124.7 area but as we anticipated the price action became really weak and many investors and traders closed their positions causing futures prices to collapse and close at 124.1 on Friday.

The actual volatility is 0.65% (10.3% annualised) but the TGARCH curve is now upward sloping and an increase in the conditional variance in the upcoming days would not be surprising.

Specifically, the last rally brought the market back into the 145.5 – 125 area which is exactly the range the price was fluctuating within before the earthquake hit Japan but at this point even a slight increase in market volatility would inevitably drag futures prices down.

Furthermore, the US dollar seems to have gained new power and a further increase of the American currency will irremediably drive the price down whilst the volatility should rise and touch 0.7% (11.1% in annual terms) creating the perfect environment for a bearish week.

The HyperVolatility team is bearish Japanese Yen futures and we will be looking for short opportunities because we believe that futures prices will collapse and touch the 122.5 – 123 area by the end of the week.

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