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Japanese Yen Breaks to Record in Least Liquid Hour of Trading Day

Japanese Yen Breaks to Record in Least Liquid Hour of Trading Day

2011-03-16 23:31:00
David Rodriguez, Head of Product
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The Japanese Yen broke to fresh record-highs against the US Dollar in the least-liquid hour of the trading day, exacerbating bid/ask spreads and making it exceedingly difficult to enter/exit trades.

The Japanese Yen thundered through fresh post-World War II peaks in a matter of minutes, confounding analysts and leaving traders shocked at the severity of the moves. Yet there was little apparent rationale behind the sudden 300-pip decline in the US Dollar/Japanese Yen pair. In fact newswires were flashing headlines that the Yen was hitting fresh highs—not the “why” or “how” behind the USDJPY tumbles.

Bloomberg Japanese Yen Newswire Virtually Blank as Currency Hits Record Highs

Japanese_yen_spreads_wide_as_hits_record_body_Picture_3.png, Japanese Yen Breaks to Record in Least Liquid Hour of Trading Day

Source: Bloomberg Professional Service

The moves occurred quite soon after the New York trading session close and during the least liquid hour of the trading day. Said fact helps explain how the heavily-traded USDJPY was able to move so far so quickly.

Japanese_yen_spreads_wide_as_hits_record_body_Picture_4.png, Japanese Yen Breaks to Record in Least Liquid Hour of Trading Day

Source: FXCM Execution Desk Data, 2010-Present

The sharp volatility likely only fed into itself, as very few market makers were willing to provide Bid prices amidst such dramatic declines. The net effect was to exacerbate already-wide spreads and provide for very poor execution/liquidity across JPY pairs. Interbank price feeds show price aggregators showed ‘grayed out’ prices through the stretch, signaling that there was in fact no hard Bid/Ask provided in said currency pair through that trade.

Trade Recap on Bloomberg Interbank Aggregation Shows Spreads as wide as 32 Pips

Japanese_yen_spreads_wide_as_hits_record_body_Picture_5.png, Japanese Yen Breaks to Record in Least Liquid Hour of Trading Day

Source: Bloomberg BGN

A number of reported trades occurred at spreads in the period shown in the table above occurred at Bid/Ask spreads as wide as an almost-incredible 32 pips. If we consider the fact that many of these transactions did not have a firm Bid price attached, the real spread could have been far wider.

DailyFX Volatility Indices Surge as Markets Extremely Volatile

Japanese_yen_spreads_wide_as_hits_record_body_Picture_6.png, Japanese Yen Breaks to Record in Least Liquid Hour of Trading Day

It is obviously impossible to predict when/if such events will happen, and there really is little way to defend against such dramatic moves. Our DailyFX Volatility Indices have surged amidst recent price action as volatility expectations show markets expect further large moves. Such shifts emphasize that traders should likely keep exposure and leverage well under control amidst incredible uncertainty surrounding the Japanese Yen and broader financial markets. We will likely need to wait for more normal market conditions to advocate trading with normal position size through the foreseeable future.

Written by David Rodriguez, Quantitative Strategist for DailyFX.com

To contact the author of this report, e-mail drodriguez@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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