JPY: Currency Index & Volatility

Relative Currency Strength

Both liquidity and volatility are usually reduced by market holidays in various countries and seasonal periods of subdued market interest, like the late summer and around the Easter and Christmas holidays. Moreover, there is a lack of important fundamental data during these days, therefore, markets are mostly driven by speculations or by the demand for safe-haven currencies. The Japanese Yen depreciated over the last five trading days, with JPY index posting a 0.48% drop, mostly due to the risk aversion caused by Ukraine tensions and disappointing data from the world’s largest economy. At the same time, the Sterling has received a strong bullish bias from the upbeat labour data, resulting in a 0.71% gain.

While most of the major currencies ended a period with a high level of divergence from the base value, all gains or losses were muted due to subdued volatility. Kuroda’s pledge on April 16 to adjust central bank’s monetary policy if needed pushed the index to 99.64, however, a day later the USD/JPY failed to retest the key resistance at 102.50, also following Kuroda’s comments. This time he pointed out that the economy remains on a steadily improving path and pledged the 2% inflation target will be reached within the planned period. On April 20, the Ministry of Finance unveiled a trade balance for March, saying the trade gap soared to 1.45 trillion yen up from 356.9 billion in the same month a year earlier. Even disappointing exports data were not able to provide a massive sell-off, with JPY index hovering around 99.70.

Volatility

As we already mentioned, currency trading remained very quiet over the observed period, as many dealing centres were just coming back from Easter holidays, while economic calendars across the major economies were almost barren. Therefore, it was not a surprise that elevated market volatility was observed only in 10% of the time, with the volatility index hitting a high only of 1.4, and averaging 0.7. One of the least volatile currency pairs, EUR/CHF, were 40% even less volatile than the market itself. In contrast, unemployment rate, business confidence and leading index from Australia, as well as reports form the world’s largest economy were pushing AUD/USD, with the elevated volatility observed in 21% of the time.

The USD/JPY was most volatile on April 16 and 17, with volatility climbing to the turbulent zone more often. These spikes were caused by Chinese GDP, industrial production from Japan and Kuroda’s speeches. On Friday, April 18, both the market and USD/JPY were almost unchanged, due to bank holidays in major countries. The USD/JPY’s volatility reached a low of 0.17 on Friday, however, later in the anticipation of Japan’s trade figures, volatility increased slightly. A fact the trade balance almost quadrupled in March caused stronger interest in the Yen, with USD/JPY volatility rising to 1.12. On Tuesday, the pair performed another spike in volatility, which was provoked by a release of the existing home sales from the United States that came stronger-than-expected.

Currency Significance

It seems that Kuroda’s comments had a strong, but short-lived effect on the Japanese Yen, as the level of JPY significance began moving to the south soon after governor’s words. The main reason for such a performance was the fact he offered no surprises and was constantly repeating his own words. Moreover, he does not believe that April’s tax hike will bring a lot of pain to the world’s largest economy, diminishing hopes for a fresh easing in the coming months. That is why investor’s interest in the Japanese Yen remains subdued. The worrying sign is that the Yen can loose its safe-haven appeal soon in case the nation’s current account condition continue to deteriorate.

The average correlation coefficient was constantly decreasing over the observed period and hit a low of 0.25 on April 21, meaning that even a release of the trade balance was not able to attract investors. The announcement made by Japan’s Nippon Life Insurance to lift its Yen bond holdings next year boosted the average correlation coefficient on April 22. The nation’s largest private life insurer increased its domestic bond holdings by 960 billion yen in the year ended in March. A release of the inflation data on April 24 is expected to boost the correlation coefficient, as any deterioration or disappointing figure will immediately trigger speculations about the weakness of Japanese economy and add more pressure on Shinzo Abe to maintain the current course in combating decade-long deflation and weak growth.