As recommended by one of our valuable readers here’s an excerpt from an interesting story by WSJ trying to explain the record surge in the Japanese Yen last week.
A day after a heart-stopping rally drove the Japanese yen to one of its sharpest ascents in history, traders and bankers blamed a freak onslaught of forced buying by Japanese individual investors and hedge funds—a barrage that came at the exact time of day when the currency market is at its most vulnerable.
In what seemed like an echo of the “flash crash” in U.S. stocks last May, the Japanese yen moved 4.6% within minutes on Wednesday, a surge that drove the currency through a record that held for 16 years and wreaked havoc on trading portfolios around the world. The move—which took the dollar from 80 yen to 76.32 shortly after 5 p.m. in New York—was one of yen’s biggest in history. It snapped back almost as quickly, jumping above 79 by the time Asian markets were in full swing.
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“It wasn’t pretty,” said Robert Sinche, global head of currency strategy at RBS Global Bank and Markets. “You had a period where there was a lot of forced buying of the yen and just nobody on the other side.”
The biggest surprise was that the move occurred in one of the most actively traded corners of the world’s financial markets. Trading between the dollar and the yen totals some $570 billion every day and such sharp moves are rare.
Integral Development, which operates electronic trading networks, saw a flood of yen buying out of Japan. Volumes were eight times normal, said Harpal Sandhu, president of Integral. Some 90% of the trades were for less than $100,000. Typically at that time of day, 40% of the trades are from individual investors, Mr. Sandhu said. “We think there were Japanese retail traders who were placing orders prior to going to work,” Mr. Sandhu says.
Read the rest here.