Volatility Draws Traders to the Japanese Yen, British Pound

Volatility in the currency markets has its pros and cons. On the plus side, the rapid shifts in price action can be exciting for traders and when price is moving in their direction, it can make trades profitable rather quickly. On the other hand, an increase in volatility can raise the risk of unexpectedly reversals, which can quickly knock out a trader’s stop on a given position.

On Tuesday, a pick up in volatility in the Japanese yen worked in favor of the contestant with the largest portfolio balance in the currency trading portion of the contest. Indeed, this trader was in first place on Monday and stayed in the top spot with a balance of $256,520.77 by taking profits on a large USD/JPY position. Contestant number 1 entered a long position on Sunday evening near 105.30 and caught the majority of Monday and Tuesday’s USD/JPY rally. This position alone is what allowed contestant number 1 to stay ahead, as he closed his USD/JPY long near 107.20, netting him over $34,000.

Meanwhile, contestant number 2 has been trading another volatile currency: the British pound. He has done well with this currency versus the US dollar, as he finished Tuesday with a portfolio balance of $182,775.46 thanks to the plunge in GBP/USD down toward 1.9550. However, contestant number 2 entered another short GBP/USD position on Tuesday afternoon around 1.9540, and he is still holding the pair.

The pair initially plummeted during the European trading session to test 1.9500 in reaction to a bigger-than-expected gain in UK jobless claims, as they rose by 9,000 during the month of May. This does not bode well for growth prospects in the UK, as the country’s labor markets have started to show a clear deterioration, while the housing sector collapses and the trade deficit widens to record levels. Sound familiar? There are major concerns within the Bank of England that the UK is in for a US-style economic slowdown or possible recession. However, also like the US, price pressures are building rapidly, and these inflation concerns will prevent the UK central bank from seriously considering additional rate cuts in the near-term.

Despite the initial GBP/USD weakness we saw this morning, contestant number 2 is floating a hefty loss in this position as the start of the New York trading session has seen the pair rocket higher. The move is due primarily to pronounced US dollar weakness versus the Japanese yen. Likewise, the euro has fallen significantly against the low-yielding yen, as these pairs tend to have a strong correlation with US equities. Indeed, the DJIA has started the day on a weak note, as the index tests the most recent lows near 12,195/200. Risk aversion is making a comeback in the markets, especially as a pick up in crude oil adds fuel to widespread inflation concerns, and this creates significant downside potential for the Japanese yen crosses, like USD/JPY and EUR/JPY.

Contestant number 3 may be better equipped for a return to risk averse sentiment in the markets, as he is currently holding a short GBP/JPY position that he entered just above 210.00. Thus, with a portfolio balance of $181,111.82 as of Tuesday’s close, this trader will likely knock contestant number 2 out of the running by this evening’s close. Nevertheless, there is still event risk for the forex markets looming on the horizon today, as the Federal Reserve’s Beige Book report will be released at 14:00 EDT. There is little doubt that additional regions will report a pick up in prices throughout the economy, but traders should keep an eye on how districts report growth conditions. In the last Beige Book release, 9 of the 12 districts indicated a slowdown in growth, and if additional districts report the same thing, the news could weigh heavily on the Japanese yen cross and the US stock markets.

Congratulations to our top traders and good luck!

Terri Belkas, Currency Analyst of DailyFX.com