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Yen beats 'Brexit'-plagued pound in currency volatility face-off

Thursday, February 25, 2016 - 13:18

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Traders foresee wilder swings in the yen than in the pound in coming months, even as the UK prepares to vote on whether to remain in the European Union.

[LONDON] Traders foresee wilder swings in the yen than in the pound in coming months, even as the UK prepares to vote on whether to remain in the European Union.

Three-month implied volatility in the dollar-yen pair has jumped 4.5 per centage points in 2016 to 12.6 per cent, the biggest increaseof any major currency against the greenback. By contrast, the same measure of swings in the pound-dollar pair rose 3.3 per centage points to 12 per cent, while euro-dollar added 1.2 percentage points to 11.1 per cent.

The Bank of Japan's unexpected expansion of stimulus last month has not stemmed strength in the yen that has made it the best-performing major currency this year, surging 7 per cent against the dollar. Investors are taking refuge in assets perceived as the safest as concern about a global slowdown fuels selloffs in commodities and equities. Uncertainty over the finely balanced June 23 referendum on a so-called "Brexit" has added to the risk-averse sentiment.

"The new information that has been processed by the markets is the question of whether central banks are nearing the limit of their ability to soothe market fears," said Sam Tuck, a senior currency strategist at ANZ Bank New Zealand in Auckland. "Pound volatility never really had the stability that we had in the yen, as there was potential for rates normalization and markets knew the referendum was coming."

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The yen fell 0.2 per cent to 112.35 per dollar as of 1:27 pm in Tokyo. It touched 110.99 on Feb. 11, a level unseen since Oct. 31, 2014, when the BOJ previously expanded stimulus.

The pound has dropped 5.4 per cent versus the dollar this year, the biggest decline among Group-of-10 peers. The currencytraded at US$1.3939 from US$1.3927 in New York. It dipped to US$1.3879 on Wednesday for the first time since March 2009. The euro was little changed at US$1.1024.

Crude oil has fallen more than 10 per cent this year, while the value of global stocks have dropped by almost 10 per cent amid uncertainty over a slowing Chinese economy and an uneven US recovery.

Group-of-20 finance ministers and central bankers meet in Shanghai from Friday, with the International Monetary Fund urging policy makers to act urgently and forcefully to implement growth strategies.

China's vice finance minister Zhu Guangyao has pledged to coordinate with the G-20 to boost global confidence, while US Treasury Secretary Jacob J. Lew has indicated there won't be a massive global effort to stem financial-market turbulence at the gathering.

"Depending on the outcome of the G-20, by Monday the outlook for dollar-yen could completely change," said Naohiro Nomoto, an associate for currency trading at Bank of Tokyo- Mitsubishi UFJ in New York. "If nothing comes out of the G-20, dollar-yen may drop again."

Whereas the yen has been the main beneficiary of the turmoil, the additional uncertainty injected by the UK referendum has seen a majority of analysts calling for the pound to fall below US$1.35 in the event of a Brexit.

UK Prime Minister David Cameron announced a June 23 date for the vote last week. Opinion polls indicate the result is likely to be close, even with Cameron and most of his cabinet urging the country to choose to stay.

"If the market gets itself even more and more wound up and worried, then sterling will remain tactically vulnerable on the downside," Daragh Maher, New-York-based head of US currency strategy at HSBC Holdings Plc, said in a Bloomberg Television interview earlier this week. "The worry factor seems to be building."

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