Tuesday, April 28, 2009

What's Up With Yen Vols (Other Than Yen Vols)?

So now that even Mrs. Watanabe has decided that the road to prosperity is paved with yen shorts, USD/JPY and all its yen-cross buddies have duly turned around and headed south. This will no doubt alarm the equity bods, who tend to shiver when they see the yen strengthen. (Little do they recognize that the currency guys are watching stocks for clues to USD/JPY! It's like something oput of M.C. Escher.)

What's interesting is that despite the yen's strengthening, vols have barely budged- the remain at the bottom of the year's range.
Is this a sign of positioning (every man and his dog owns long-dated upside), a sign of complacency, or a sign (like just about everything else these days) that it ain't so bad and we should all buy stocks?

Inquiring minds want to know...


Anonymous said...

Maybe it's a signal that there is a real lack of risk appetite anywhere at the moment: the FX Options market makers at the big banks are wary of taking positions in the current TARP/FSA/Big Brother flavoured environment; the Hedge Funds have been disappointed recently when loading up on FX Vol only to watch it decay away as there is little reaction to various "events" (the kind of events that would previously have caused a spike in vol)and are therefore reluctant to play; and most Investment Banks are dismantling (or severely curtailing the activities of) their prop desks => who is around to buy vol in the kind of size needed to shift it higher? Therefore, in the true spirit of random walking, the best price is the, er, last price, ad infinitum

TG said...

The yen crosses are not even close to delivering to implieds, and that's with this move lower in spot and taking out the very small bounce in USDJPY vol the last few days. 1m actuals are only about 10% vs 1m mid implied of 15.6. The decay bill was fine to pay when you had a "tail event" going on every other day. But, with QE, intervention (or half-assed intervention as far as the SNB are concerned), and the like being implemented and being inherently vega killers, that's finally starting to weigh.

Yen skew is the big conundrum - spot falls 4 big figures? Vol rallies a fraction and nothing like it would have 18 months ago. Spot rallies 4 big figures? Vol falls a fraction as part of the broader grind lower in vol. But nowhere near what the risk reversal implies in either direction.

Yohay said...

The story of the Yen is sad. Very sad.

Anonymous said...

You JPY observation reminds me of this fable:
It was autumn, and the Indians on the remote reservation asked their new Chief if the winter was going to be cold or mild. Since he was a new Indian Chief in a modern society, he had never been taught the old secrets, and when he looked at the sky, he couldn't tell what the weather was going to be. Nevertheless, to be on the safe side, he replied to his tribe that the winter was indeed going to be cold and that the members of the village should collect wood to be prepared. But also being a practical leader, after several days he got an idea. He went to the phone booth, called the National Weather Service and asked,
"Is the coming winter going to be cold?"
"It looks like this winter is going to be quite cold indeed," the meteorologist at the weather service responded.
So the Chief went back to his people and told them to collect even more wood in order to be prepared. A week later he called the National Weather Service again.
"Is it going to be a very cold winter?"
"Yes," the man at National Weather Service again replied, "it's going to be a very cold winter."
The Chief again went back to his people and ordered them to collect every scrap of wood they could find. Two weeks later he called the National Weather Service again.
"Are you absolutely sure that the winter is going to be very cold?"
"Absolutely," the man replied. "It's going to be one of the coldest winters ever."
"How can you be so sure?" the Chief asked.
The weatherman replied, "The Indians are collecting wood like crazy!"

Trader said...


I suggest a full cathartic release of the emotions that block your trading.

Release those emotions and your path clears

Cornelius said...

Heh - posted about a pretty similar topic about 30 min before you did (or maybe it is after... I don't remember NY-London time difference).


fodacadillac said...

Are investors finally understanding there's a difference between "economy decelerating at a slower pace" and "we've troughed and are heading back up?"

Yen crosses seem to get the difference as they largely didn't participate in the run up in equities that began in early March.

Anonymous said...

this one is quite simple
the definition of usdjpy has changed. and you can see the change via the vol.
+jpy is now +risk appetite (i cant spell but i get yen)

-also mm. i resigned recently (so my feel is not as tight - & being in venice and drinking Gaja wont help), but im convinced we are going higher.
i obviously think your quite astute, but i think you are trying to will this mkt lower. get on the gravy train and buy some anr/drys/bhp/rtp/uyg/gs/jpm/fcx/crude/gold - look, the 10yr is going to bust 3%. that ceiling is going to blow - the fed is going to slam it back down, and stocks are going to soar like an eagle.

-mpm (trying my best not to look like a tourist)

Anonymous said...

Post Lehman alot of PRDC (Power Reverse Dual Currency) exposure was unwound. This removed a lot of the downside USDJPY risk. So now there is just not so much interest in FX. Spreads are also wider and volume depending on how you measure it is down about 30-50% from a year ago. The other wrinkle is QE caught FX on the back foot. In theory QE should depreciate a currency but when everyone does it you just get an equity rally. Capital is playing in equities and not FX and in equities they want to sell. This is why equities tend to open weaker and finish stronger. The price action says everyone tries to top pick at the moment. Do you know any equity bulls - or just bears?
Oh I also forgot to mention, since global trade has collapsed, corporates have had much more difficulty forecasting foreign currency exposure, so they trade less to. You just cant blame hedge funds for everything.