Japanese Yen Futures Volatility Forecast (22/08/2011)

The last week we were expecting a retracement of the market which would have been favoured by a softening of the panic among investors but the bad figures regarding the manufacturing industry in US and irresponsible politicians poured fuel on flames. In fact, Japanese Yen futures opened at 130.1 on Monday, rose to 130.3 on Tuesday, jumped to 130.7 on Wednesday, retraced at 130.6 on Thursday and closed at 130.7 on Friday.

The current volatility is 0.52% (8.2% annualised) and the TGARCH curve is clearly displaying a curve which is now fluctuating within its equilibrium point. The plot is highlighting a low volatility environment which is probably going to last for another while because the Japanese currency is being bought by investors who consider it a safe haven type of asset class.

Many investors and traders kept buying Japanese Yen futures in order to diversify their portfolios and run away from risky markets but it is worth noting that the Bank of Japan keeps trying to devaluate its currency and the current price action is clearly in an overbought zone with the volatility just ready to explode on the upside and drag futures prices back down again.

The HyperVolatility team is neither bullish nor bearish on this market because a lot of things will depend upon macro-events:

1)    An ulterior sell off will cause the volatility to remain where it is whilst the price action could hit the 131 – 131.5 area by Friday.

2)    Should things get back to normal in the equity world, Japanese Yen futures volatility would literally explode and the price would be inevitably pushed back down in the 128 area by Friday.

This week we decided to opt for a double scenario type of forecast because of the massive uncertainty amongst investors but we certainly reckon that the conditional variance is way too low to remain unaltered for an extended period of time.

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