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Japanese Yen Futures Volatility Forecast (23/05/2011)

The last week we were bearish Japanese Yen futures and our profit target was around the 122 – 122.5 area: our forecasts proved very profitable once again. The market opened at 123.8 dropped to 122.3 and closed at 122.4

The actual volatility is 0.51% (8% annualised) and the TGARCH plot is showing a volatility curve which is fairly stable although the very last part is manifestly upward sloping.

However, the drop in the price action has not been accompanied by a proportional rise in the conditional variance and this phenomenon is quite suspicious. Additionally, the very last part of the volatility curve is now heading north signalling that the real down move is just commenced and unlikely to be over.

The variance is still fairly low and we still wonder whether this situation is sustainable in the long run but the answer we keep giving ourselves its always the same: a mean reverting move is more likely to occur than an ulterior plummet of the oscillation rate.

The HyperVolatility team remains bearish on Japanese Yen futures because the variance should increase and eventually touch the 0.61% – 0.63% zone (9.6% – 9.9% in annual terms) whilst the price should plunge and probably test the 120.5 – 121 area.

Nevertheless, once futures prices approach this support we should see a bit of a sideways movement because a break through this threshold it is quite unlikely to happen (at least in the following week).

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