Yen Traders Celebrate Volatility

Since the global financial crisis, the Bank of Japan’s (BOJ) policy decision has been the biggest threat to the dollar-yen pair. Traders wagered that a 2% or higher move in either direction would occur.

Traders positioned for another policy change following a surprise move in December, so the pair’s overnight implied volatility increased to a four-year high. They have turned up the heat on the central bank by pushing the 10-year bond yield above its ceiling for three days since the BOJ raised its yield curve control program’s ceiling last month.

With the shift expected to boost the yen and cause international bond yields to rise, another shift in BOJ policy would impact worldwide. Dollar-yen is likely to climb if the central bank stays calm. Meanwhile, investors anticipating a shift will seek to cover their short bets.

Economists Bet on Loose Policy Continuation

Economists widely expect the BOJ’s ultra-loose monetary policy and yield curve control maintenance. However, since the BOJ’s surprise move in December, a conviction on this forecast has been fading. In addition, traders recognize a possible further adjustment on Wednesday.

Yen depreciation against other currencies is also increasing, with the euro-yen one-day volatility reaching 47.58%. This number was last seen in July 2016. According to a European-based trader, liquidity for short-term yen options was deteriorating, and spreads were broadening.

Simon Harvey is the chief of foreign-exchange research at Monex Europe Ltd. According to him, there is an underlying sentiment that the Bank of Japan has no clear way out of its predicament.

The dollar-yen’s overnight volatility level suggests a 70% chance the currency pair will trade in a 125.12-132.29 range on Wednesday, compared to 129 on Tuesday. This highlights the risk of erratic movements. Due to the ongoing yen rollercoaster, one can only watch and examine what the future will bring. However, until there’s a space to celebrate, let’s celebrate.