Jen regains its form - the most volatile currency in FX

In the currency market, high volatility may appear on several pairs simultaneously or selectively on one of the currencies. Currently, the name of the most volatile main currency appears to be the Japanese yen, and the volatility of the JPY-related currency pairs appears to be the greatest in the past weeks.

Powerful pairs volatility with the yen

To imagine the scale of changes that take place, for example, in a pair USD / JPY, it is worth recalling that at the beginning of the year, the dollar had to be paid 100 yen. Meanwhile, a month ago the dollar already cost almost 140 yen, which means a 40% increase in the rate in just over six months. Then the USD / JPY exchange rate reached its highest level since 1998.

Importantly, in the case of Japan, we are not talking about the economy of a developing country or one mired in a political or economic crisis, but about one of the world's leading economies. The USD / JPY rally seemed to result from the discrepancy in the monetary policy pursued by the US Federal Reserve and Bank of Japan. The Fed strenuously tightens the monetary policy, while the Bank of Japan resists any increases in interest rates, including bond yields, by continuing to purchase unlimited amounts.

However, while the policy of the Bank of Japan maintains its course, the market started to play against a possible turn in the Fed's actions. This could reduce the spread in US bond yields versus Japan and lead to a strong return in the USD / JPY exchange rate. The difference in profitability 10-year US Treasuries and the corresponding Japanese debt remained close to the lowest level in nearly 4 months and amounted to approx. 245 basis points, which could weaken the attractiveness of the dollar.

USD / JPY at its lowest in 1,5 months

In early August, the dollar was around 131 yen, and it took only three weeks to move from around 140 yen. This is a relatively big change for the currencies of the world's major economies. As a result, the US dollar has dropped to its 6-week low against the Japanese yen, and investors appear to be increasing bets that aggressive Federal Reserve monetary policy could drive the economy into a recession.

Traditional market recession indicators (like the yield curve) appear to be falling to their lowest levels this year, and investors are increasingly confident that US interest rates will peak by the end of 2022, according to data from the federal funds rate futures market. This may have an impact on the potential weakening of the US dollar.