Yen Rallies Most Since 2011 as Volatility Rises Highest in Year

The yen rallied the most in two years against the dollar amid mounting speculation about the Federal Reserve reducing stimulus, spurring a gauge of volatility to the highest level since June 2012.

JPMorgan Chase & Co.’s Group of Seven Volatility Index, based on currency option premiums, rose as traders unwound bets on a weaker yen that were based on the Bank of Japan’s monetary stimulus. The euro strengthened to a three-month high against the dollar as European Central Bank President Mario Draghi said the region’s economy should recover this year. The Labor Department is forecast to report tomorrow that the U.S. added 163,000 jobs in May, and the jobless rate was unchanged at 7.5 percent, key figures as the Fed debates the duration of its stimulus programs.

“This is a very extreme move relative to what you expect, even ahead of” the employment report tomorrow, Brad Bechtel, managing director at Faros Trading LLC in Stamford, Connecticut, said in a telephone interview. “It’s definitely on the extreme side and liquidity became challenging.”

The yen rallied 2.1 percent to 96.97 per dollar at 5:02 p.m. New York time. The euro rose 1.2 percent to $1.3246, reaching its strongest level since Feb. 25. The single currency lost 1 percent to 128.45 yen.

Yen Levels

Japan’s currency reached its strongest level since April 16 and had the biggest intraday gain since March 17, 2011, when it rallied on speculation Japan would delay intervention to limit the currency’s advance as the nation struggled to avert disaster at a nuclear-power plant.

JPMorgan Chase & Co.’s Volatility Index, based on currency option premiums, touched 10.38 percent, the highest level since June 2012. Yields on Japan’s 10-year government bonds climbed to as much as 1 percent on May 23, compared with a record low of 0.325 on April 5.

Futures traders had increased their bets that the yen will weaken against the dollar to the most since July 2007. The difference in the number of wagers by hedge funds and other large speculators on a decline in Japan’s currency compared with those on a gain, known as net shorts, was 99,769 contracts on May 28, versus 95,186 a week earlier, figures from the Washington-based Commodity Futures Trading Commission show.

Abe Policies

The yen’s appreciation comes as Japanese equities, the best performing in the world during the past seven months on speculation Prime Minister Shinzo Abe’s policies would end two decades of deflation, are giving gains back. The Topix Index, which rose as much as 77 percent between mid-November and May 22, has lost more than 16 percent since.

“Concerns around the Bank of Japan’s control of the Japanese money supply are what triggered much of the turbulence we are seeing,” Michael Schmanske, founder and chief executive officer of New York-based Glenshaw Capital Management LLC, said in an interview. “Trepidations around the Fed’s tapering of QE was only the straw that forced the crowded currency trades to break.”

Abe failed to provide additional detail on stimulus measures yesterday. He said a legislative campaign to loosen rules on businesses won’t begin for months as he outlined his “third arrow” of an economic revival plan that seeks to build on fiscal and monetary stimulus.

BOJ Governor Haruhiko Kuroda told reporters in Tokyo last week that the central bank will conduct its debt purchases in a flexible manner, and that the recent volatility in government securities isn’t yet affecting the economy.

The yen has weakened 21.1 percent in the past year, the most among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar lost 1.7 percent while the euro gained 4.3 percent.

Key Sectors

“The weakness in dollar-yen, as the cross took out stops, pushed a positioning clear-out that took place across the G-10,” Brian Daingerfield, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said in a telephone interview. “The catalyst of broad-based dollar weakness was dollar-yen breaking through some important levels on the downside, 98.80 and then 98.50.” Stops are orders that a triggered when prices reached pre-set levels.

The ECB kept its benchmark rate at 0.5 percent in line with the predictions of all except two of 59 economists surveyed by Bloomberg News. Morgan Stanley & Co. and IHS Global Insight were the only institutions predicting a quarter-point reduction.

“Recent developments in economic sentiment data have shown some improvements,” Draghi said at a press conference in Frankfurt after the rate decision was announced. “Overall, economic activity should stabilize and recover over the course of the year.”

The ECB cut its growth forecast for this year, predicting the economy will shrink 0.6 percent. Policy makers raised their 2014 forecast to show growth of 1.1 percent.

Euro Bids

“People are buying the euro because it’s less likely now that you’re going to get any further blood out of the stone from the ECB in terms of looser monetary policy,” Andrew Wilkinson, chief economic strategist at Miller Tabak & Co., in New York said in a telephone interview. “The overall takeaway from the ECB’s comments is we have a series of measures that we could put in place, but we’ve chosen to keep them on the shelf. I think that’s why Spanish and Italian bond yields have been hit.”

Yields on 10-year Italian government bonds rose 23 basis points, the most since July, to 4.36 percent. Similar-maturity Spanish debt yields climbed 25 basis points to 4.69 percent, the highest level since April 16.

Pound Up

The pound advanced for a second day against the dollar as a Halifax report showed British house prices increased for a fourth month in May, adding to signs the economy is recovering.

Bank of England policy makers kept their key interest rate at 0.5 percent and their target for bond purchases at 375 billion pounds ($580 billion) at their meeting in London.

“I probably will tweak my sterling forecasts just to make them a bit stronger by the end of the year on the back of the data that we’ve seen,” said Jane Foley, senior currency strategist at Rabobank International in London. “Everybody anticipated that it would be a fairly non-event meeting today” from the Bank of England.

The pound climbed 1.3 percent to $1.5600, after rising to the highest level since Feb. 13.

Before it's here, it's on the Bloomberg Terminal.