Japanese Yen Futures Volatility Forecast (24/07/2011)

Japanese Yen futures rallied sharply over the last 5 trading days because the market opened at 126.5 on Monday, dropped to 126.2 on Tuesday, jumped to 127.01 on Wednesday, settled at 127.5 on Thursday and closed at 127.4 on Friday.

The volatility is now 0.55% (8.7% annualised) and the TGARCH plot is displaying a fairly stable volatility curve which, although sensibly upward sloping, seems suggesting that the upcoming hours will see a moderate rate of market fluctuations.

On the other hand, it is worth pointing out that the price has now achieved the 127.4 level which has been touched only once in the last 2 years. Precisely, this strong resistance point was tested by investors soon after that terrible earthquake hit Japan and, although the “fundamental reason” was very strong, the price action got pushed back by central banks which wanted to prevent an excess of speculation.

The actual threshold will be very hard to break and, although the Japanese Yen keeps appreciating against the US dollar, it is likely that the price will fluctuate just below the 127.4 line in order to test market’s sentiment once again.

The volatility should remain low because the sideways movement of futures prices should keep the oscillation rate in the actual area but in the second half of the week there could be some short term explosions of the conditional variance which could possibly drag the price down.

The HyperVolatility team is bearish Japanese Yen futures, even if we expect a lateral movement of the price in the first 2 days of the next week, because the short term augment of volatility is likely to bring futures prices back down in the 125.5 – 126 area by the next Friday.

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