A China-induced rout in global stocks lifted trader expectations of price swings in the yen against the dollar by the most since March 2011 on Monday as investors swarmed to the safest assets.
The yen surged 3.1 percent to start the week, the biggest advance since May 2010, after the Shanghai Composite Index slumped 8.5 percent. At one point, Japan’s currency surged 2.76 yen to a seven-month high of 116.18 per dollar in the space of about a minute. Implied volatility over three months jumped by two percentage points, the most since an almost three percentage point increase after a meltdown at the Fukushima nuclear plant following a deadly earthquake four years ago.
“The selloff in assets everywhere yesterday was as sharp as during the Lehman shock” of 2008, said Daisuke Karakama, chief market economist at Mizuho Bank Ltd. in Tokyo. “If a lot of investors are thinking that the next crisis has come, something like March 2011 looks insignificant for markets by comparison.”
Demand for protection against yen appreciation versus the dollar over the next three months climbed to the highest since February 2014. The 25-delta risk reversals reached minus 1.0450 percent on Monday.
Volatility is rising across currencies, according to a JPMorgan Chase & Co. global index. The gauge rose the most in seven months Monday to touch 11.17 percent, a level unseen since Feb. 12.
It’s set to rise even higher before year-end, as the Federal Reserve prepares to raise interest rates for the first time since 2006, potentially adding to selloffs in equities, particularly in emerging markets, according to Commonwealth Bank of Australia.
“Volatility is probably still a bit low given the risks that are out there,” said Joseph Capurso, a Sydney-based strategist at the lender, who predicts a Fed rate increase in December. “I didn’t expect it to go up that much in one day, but I’m not surprised that it’s going up.”
For Japan, the yen’s surge could counter efforts to keep the economy on a recovery from two decades of stagnation.
Finance Minister Taro Aso criticized China’s recent intervention in financial markets. Authorities in the world’s second-largest economy devalued the yuan two weeks ago, accelerating a decline in stocks that has erased more than $8 trillion worldwide.
“It’s not really the kind of action I would expect from authorities of a nation that aims to have an international currency,” Aso told reporters in Tokyo on Tuesday. “There’s concern in the market because what’s happened goes against common sense vis-a-vis international currencies,” he said, referring to halting trading in stocks and intervening in the currency market.
The yen fell 0.6 percent to 119.15 per dollar as of 7:49 a.m. in London, leading declines against the greenback among major currencies after a Ministry of Finance official called Monday’s rally “abrupt.”
More verbal intervention is coming, according to Simon Pianfetti, a senior manager at the market solutions department at SMBC Trust Bank Ltd. in Tokyo.
“The panic selling is behind us,” he said. “As much as dollar-yen is a buy at current levels, volatility is a sell.”