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Forex Traders Prepare for Potential Yen Volatility During Golden Week Market Closure

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With Japan heading towards an unparalleled market holiday, traders around the world are worried about the possibility of a quick crash or violent price movement in currencies. This type of rate fluctuation can take place during times when traders are not actively trading and market turnover is extremely thin. The Japanese markets will be closed for trading from April 29th to May 6th, easily the lengthiest modern day break to take place. The market closure is due to the celebration of Crown Prince Naruhito’s enthronement as the future emperor.

In order to prepare themselves, many investors are implementing a variety of forex strategies, including reducing their yen holding and raising hedges on their FX exposures. Some investors are looking far into the holdings of several major Japanese retail investors, whose sizable wagers and herd mentality can disrupt prices.

Investors have previously suffered through two separate “flash” market crashes this year when the Japanese market was closed for trading. One of these took place in January when the sanctuary yen spiked in price and caused a variety of currencies which are quite sensitive to risk appetite falling. Another quick crash followed in February where we witnessed the Swiss Franc move wildly.

Japan and China are not the only markets to be closed, as nearly all of Europe will be closed in observance of Labor Day. The United States Federal Reserve will hold a two-day policy conference on April 30th to May 1st, reducing a potentially sizable market threat into a very thin trading pool. In addition, China is scheduled to release crucial economic activity details on April 30th and also on May 2nd, while the lengthy Sino-U.S. trade discussions also continue next week.

Some traders are concerned that unfavorable news could push investors out of their short yen positions, which they typically borrow to finance acquisitions of higher yielding, higher risk currencies. This is precisely what transpired in January when a deluge of stop-loss sales pushed the USD down by nearly four whole yen in mere minutes.

Some experts are recommending that investors should purchase the yen versus the Australian dollar, acquiring the opposite of what is a common carry-trade for Japanese investors. Yet another suggestion is to acquire insurance against erratic price moves by going long on the market anticipation for upcoming volatility on the Aussie-yen pairing. A number of major investors are already employing such strategies by borrowing USD to purchase yen, recent data shows.

Some have also reduced bets that the yen will drop versus the Australian dollar, a popular play. However, they continue to have major exposure to the Turkish lira as well as the South African rand, taking long positions in the lira above price levels observed during the crash in January.

With expectations of potentially abrupt market movements, the Tokyo Financial Exchange has asked that retail clients increase their margin deposits or lighten up positions prior to the holidays. There are exist indications that global investors are counting on a sharp yen surge over the short-term, especially through yen calls within the options market. Oddly enough, the overall decrease in currency volatility during recent times further contributes to the threat of a quick crash.

Derivative traders are faced with the temptation to sell implied volatility throughout the markets in the expectancy that all will continue to be calm. If volatility were to surge abruptly, lots of those positions could then be under water, driving additional short-covering. Without a doubt, one-month implied volatility in the yen is now close to 4.5, less than the nearly 7 noted during last year’s Golden Week.

Japan’s Golden Week break not caused high levels of volatility in the forex markets over the last few years. Even so, with volatility being so low, the threat that we can see some type of event within the FX markets has increased and traders are advised to be on alert.

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