Japanese Yen Flash Crash


Japanese YenThe very earliest part of the recent Asian session saw unusually sharp, strong and rapid price movement in the Japanese Yen, although a few other currencies including the Australian Dollar were clearly affected directly themselves. The Yen leapt in value and was up against the U.S. Dollar by more than 3% in less than five minutes. However, the Yen’s strongest move against another currency was against the Australian Dollar, and this cross saw a gain of more than 7% for the Yen against the Aussie in less than an hour.

So far so good. There are a few things worth remembering when there are large movements of this size. One is that volatility tends to cluster, so the chance that the price will continue to move by relatively large amounts has increased. The second is the old maxim “accidents happen in line with the path of least resistance”. We’ve seen that this large move in favor of the Yen has come at a time when the long-term trend in the Yen is clearly up. There is also a larger fundamental issue at work, which is that stock markets are selling off and there are liquidated assets looking for safer havens, and the Japanese Yen (along with precious metals) is certainly behaving like one right now.

So, could it be that this is the start of something bigger, or is it just a “spike”? The best may to try to make a judgment on that is to look at how the price has behaved since the origin of the move. Looking at the AUD/JPY currency cross first, as it was the biggest mover, we see that about 80% of the move has already retraced. If we look at USD/JPY, it has given up about 70% of its earlier move. In EUR/JPY, we have seen a maximum retracement of just under 75%. Using the rule of thumb that an immediate retracement should ideally by less than half of the impulsive movement, these numbers suggest that this is looking more like a spike than a trend move. It may be wisest to stand aside and see whether the price settles before entering any new trades in the Japanese Yen.

Adam is a Forex trader who has worked within financial markets for over 12 years, including 6 years with Merrill Lynch. He is certified in Fund Management and Investment Management by the U.K. Chartered Institute for Securities & Investment.