JPY: Currency Index & Volatility

Relative Currency Strength

While the majority of currencies, including US, Australian and Canadian dollars started the period with an immediate decline, the Japanese yen increased up to 101 points already in the first day on December 10. The strong advance was, however, rather surprising, as country’s statistical data on core machinery orders and activity in the services industry used to be much worse than estimated. The middle of the period was marked with a rather calm development of the currency, except Monday’s morning, when optimistic results of lower house elections in Japan were announced. Meanwhile, on Tuesday the Yen surged the most and reached 103 points on positive data both locally and from abroad.

The JPY Index was located well above the main baseline for the whole time period between December 10 and December 16, as the currency registered the fastest weekly advance among all majors. However, it is worth pointing out that JPY dominated its counterparts only in the end of the period, while on December 11-12 the leadership was taken by the New Zealand’s dollar. Nevertheless, the Yen added 2.03% over five trading days, with posting the fastest rise against the Loonie and Swedish Krona by 3.69% and 3.35%, respectively. Meanwhile, Canadian dollar dropped the most, losing 2.07%.

Volatility

Fundamental data on machinery orders and tertiary industry activity in Japan were strongly fuelled by interest rate decision of the Reserve Bank of New Zealand and its monetary policy statement, which drove the overall volatility index of the Japanese yen above 2.5 points already on Wednesday. Except Thursday, the period was rich on other statistical data in Japan and from all around the world, which held the Yen’s volatility above the baseline around 1.5-2 points. On Tuesday, however, the indicator reached its weekly maximum at 3.91 points, the highest level in many weeks, mostly due to data on Japanese trade balance, PMI indicators in some Eurozone’s countries, RBA’s interest rate decision, falling UK inflation and other factors.

Even though it may seem that for the most part of period volatility of the Yen was rather quiet, its index was above 1.5 points almost all the time. Especially strong impetus to the turbulence index was provided on Wednesday of the previous week and Tuesday of the current week. Concerning elevated volatility indicators, the Yen posted unusually high results, because it exceed the “normal” zone during 91% in course of the December 10-16 period. Moreover, GBP/JPY currency pair was volatile in 96% of the observed time period. Elevated turbulence for all JPY currency pairs exceeded the market average of 58%, which can also be considered as rather high, compared to a number of weeks before.

Currency Significance

Almost all parts of the period were remarkable with synchronized developments in absolutely all yen’s correlation components. It seems that fundamental data had quite the same influence on the majority of currency pairs with the Japanese yen. The composite itself reached the maximum levels just below 0.90 for two times—in the beginning and end of the period. From Friday till Tuesday’s morning correlations stood around the average level of 0.72. Taking into account the minimum significance level of the composite, it was reached on Thursday around 0.55 points, when a lot of important fundamental statistics from outside Japan had some particular impact on different currency pairs, especially on those with the Australian dollar.

It seems that the previous week was rather unusual not only in terms of high volatility and strong gains of the Yen itself, but also because of very strong correlation between different JPY crosses. At the same time, we should notice that the Yen’s composite was swinging both above and below the average level for almost equal periods of time. The short-term correlations during the period between JPY/EUR and other crosses of the Japanese currency ranged from 0.58% to 0.95%, marking very high correlation coefficients. Moreover, the 5-day values exceed 20-day ones by, on average, 0.10-0.15 points.