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Foreign Exchange

FX news: Yen in focus – looming margin regs, suppressed vols, invisible barriers

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.

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