Tuesday, August 12, 2014

As-You-Were for Dollar / Yen | Low volatility in the Forex market

For some time now the USDJPY pair has been in a pronounced range bound pattern, moving resolutely sideways instead of in the trending manner that we prefer for garnering profits. Last night, when the latest GDP figures for the Land of The Rising Sun were announced, in the midst of expectations for the worst reading for 25 years, there was no exception to this rule.

The reason for the apprehension was the fact that the Japanese government has introduced a new and hefty sales tax, which was expected to have the effect of reducing the Year-on-Year outturn for GDP from a level of plus 6.1% previously, to a disastrous sounding negative 7.1% this time around. In the event, the actual reported GDP last night was “only” -6.8%. Many market participants were expecting the publication of GDP to greatly weaken the value of the Yen which, combined with recent relative Dollar strength, would have the effect of driving USDJPY strongly upward. In the event, the Forex market merely yawned.

One reason for this might be the realization that, no matter how bad the figure, this is a one-off as a result of the new sales tax, which will become assimilated into the economy from here on.

Low volatility in the Forex market

As typified by the Dollar / Yen trading pattern, even prior to the summer holiday season volatility has been low in the Forex market. This means that dealing activity is much subdued, leading to low levels of rise and fall of exchange rates. This, in turn, limits the potential for trend following traders to exploit profit opportunities.

The reasons given for this state of affairs include the current low global interest rates, which means the yield following members of the Carry Trade have fewer places to go, to the recent investigations into manipulation of Forex rates, which might cause some aggressive market participants to pull in their horns, so to speak.

But now there are indications, from several Forex brokers, that trading activity is picking up again. Perhaps when the major players return from their Summer hols, which would be expected to be complete towards the end of this month, trading volumes and rate movement will get back towards normal.

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