Friday, April 1, 2011

Yen in Freefall - Apr 1

Yen in Freefall
April 1st, 2011

Volatile Start to Q2

The Japanese yen is making multi-month lows this morning against every major currency, following stronger than expected Non-Farm Payrolls in the United States.  The biggest decline is versus the Canadian dollar, against which it is currently down 2.31 percent on the day.  Front month June futures reached a low of 118.06, the lowest level since September 2010 when the Bank of Japan engaged in unilateral intervention, selling 2.12 trillion yen in a failed attempt to stem the currency’s rise, the first such foray into the FX market since 2004.

Aftermath of the Earthquake

Following the devastating earthquake on March 11th, the Japanese yen rose briskly to a high of 129.57 (basis June futures) in anticipation of heavy repatriation of assets to cover insurance claims and pay for reconstruction.  One week later, the BOJ in coordination with the central banks of the Group of Seven intervened in the forex market, driving the yen sharply lower.  While the total yen sales by the G7 central banks is not known, most traders believe the BOJ did most of the heavy lifting, and the Finance Ministry has reported sales totaling 692.5 billion yen.  This amount pales in comparison to the failed effort last fall; however the coordinated nature of the intervention, the first such move by the G7 since 2000, has been regarded by the market as a credible cap on future yen strength.  Since the intervention, the yen has fallen over 8 percent against the U.S. dollar (see chart).

June Japanese yen Futures
Courtesy of Bloomberg

Interestingly, while the market has been highly volatile, options implied volatility has been steadily declining over the past couple of weeks, from a high before the intervention of 15.54, to 10.83 today. 


Recent estimates from Japan’s government peg the damages from the earthquake and ensuing tsunami at as much as 25 trillion yen.  Many believe that this will require insurance companies to liquidate foreign assets, putting upwards pressure on the yen.  Thus far, this has not been evident in the data.  In fact, since the intervention, net Japanese buying of foreign bonds has jumped to 973.3 billion yen ($11.6 billion) in the week ended March 25th, the highest since last September.  Japanese investors are probably taking advantage of the central banks’ implied cap on the rising yen, easing the need to hedge the currency, and are now flocking to higher yielding assets abroad. 

-Jaime Macrae, CIM
Account Executive, Friedberg Mercantile Group

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