Yen Extends Wild Ride, Mounting Bounce Back From Four-Year Low
(Bloomberg) -- The cost of hedging short-term moves in the yen rose to a one-year high after increased fluctuations that saw the currency bounce off a four-year low Wednesday.
Three-month implied volatility on the pair jumped to 6.9%, making it more expensive for the likes of corporates and Japan’s large insurers to protect against price swings. One-month implied volatility rose higher, with the spread between the two hitting the most positive in a year, a sign the market is pricing in the risk of more immediate swings in the foreign-exchange market.
The volatility has been driven heavily by swings in U.S. Treasury yields, which have climbed on increased inflationary pressure and traders bringing forward bets for the Federal Reserve to hike interest rates. That contrasts with a still-dovish outlook from the Bank of Japan.
“Rising inflation makes for potentially higher currency volatility in so far it adds to uncertainty about central bank reaction functions,” said Ray Attrill, head of currency strategy at National Australia Bank Ltd.
The dollar-yen pair has seen a number of drastic moves in November. The yen started as the best-performing Group-of-10 currency through the first third of the month, before giving up all of its gains in a single day and then proceeding on to a multi-year low. Its next critical level will be the psychologically important 115 level.
Following the build-up in U.S. price expectations, investors will be closely watching core PCE data next week -- the Fed’s preferred inflation barometer.
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