The last week few days have been confusing for JPY players. Last Thursday USD/JPY was again knocking on the low of 86.30, with a pre-month-end JPY appreciation, due to a decrease in retail leverage, expected to take the move further. But the further JPY strength hasn’t materialised: implied volatility, usually bid when USD/JPY is getting sold, continues to be suppressed at close to 11% in the threes while spot USD/JPY is back to around 87.50.
The regulatory news in retail FX is that the Japanese FSA has ruled that leverage is to be restricted to 50:1 from August 1 2010, falling to 25:1 from August 2011; up until now there has been no restriction on the leverage permitted in retail FX in Japan.
Japanese retail FX, with volume of around $70 billion per day (according to Bank of Tokyo Mitsubishi calculations), is massive when compared with the $125.2 billion per day (spot plus outright FX) reported in the turnover survey (of the “20 leading financial institutions”) released by the Tokyo FX Market Committee on Monday.
Research papers from Bank of Tokyo Mitsubishi and CitiFX have taken a look at the potential impact of the regulation on the market. It is clear that retail players were net short of JPY: BoTM estimates that, as of last Friday, there was an “overall margin trading yen short position of $63 billion.” More than 85% of the short position on the Tokyo Financial Exchange (TFX) is evenly split between AUD/JPY and USD/JPY. The TFX only represents 5% of margined trading volume, which both BoTM and CitiFX believe to be representative of the Japanese retail market as a whole. With 40% of the market trading at margin in excess of 60:1, it is little wonder that there was expectation of further JPY strength.
But CitiFX points out that the 60:1 figure comes from data over a year old; that some of the major retail platforms have already begun began restricting leverage; and that there is evidence of retail investors using less than the available leverage lately. All this helps explain the non-move and suggests that the overall market just over-positioned itself at lower levels.
Both BoTM and CitiFX conclude that the new leverage regulations might still provoke some appreciation. BoTM suspects that “the impact will be modest and temporary”, while CitiFX says that “it will not cause [a big enough] impact to break through 85.00”.
So it looks like it will end up being a bit of a non-event. An indication of how much spot JPY pros were anticipating for the month-end can be seen in their despair at a move of a mere one-and-a-half big figures off the base.
Of course, top-side barriers can have a magnetic effect, but spot USD/JPY has been sub-88.00 for less that two weeks. It seems unlikely there could be much barrier action so close in price and time to expiry, but the boys at Citi tell me there are some 88.50 strikes expiring tomorrow.
Lastly, about suppressed USD/JPY volatility: is it conceivable that for once volatility could spike on a USD/JPY up-move? Probably not, but it’s a strange market. Paul Day at Market Securities – who has applied his Tom DeMark stuff to three-month USD/JPY vol and the tea-leaves, inkblot, or whatever – says it could be worth being long. I don’t know how it does its magic but TDM has gathered a good few fans over the last few years, so perhaps we should pay attention. Day reckons 91.25 JPY puts might be reasonable: whether or not vol moves higher, it could be a cheap way to play a move up in spot.
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| Chart courtesy Bloomberg/Market Securities |
