Japanese Yen Traders Bracing for Volatility, Brokers Cut Leverage

Last time Shinzo Abe scored a major election victory, the Japanese yen collapsed under the weight of his easing plan.

As the electoral season in Europe ends with the last polls in Germany, we switch focus to the Far East. The Japanese parliament is due for a shakeup as current Prime Minister Shinzo Abe called snap elections earlier this year.

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Famous for his policy of ‘Abenomics’, the current leader of the Liberal Democratic Party (LDP) called the election due to challenging times for his coalition with Komeito.

After he became Prime Minister in December 2012, Abe launched a major effort involving the loosening of monetary and fiscal policy. In an unprecedented move, the political pressure on the Bank of Japan to deliver more easing resulted in the country being the world’s largest issuer of new bills as a percentage of GDP.

The money printing machine that Abe promised in 2012 has driven the Japanese currency to multi-year lows and resulted in the highest ever trading volumes for Japanese brokers at the time.

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Retail Brokers Hike Margin Requirements

At least three retail brokers have announced that they will be increasing margin requirements in the run-up to the election this weekend. FxPro is increasing the requirement to 1 percent (1:100) on all Japanese yen crosses.

Roboforex is introducing a similar limitation with the standard margin requirements on MT5 ECN accounts being increased by a factor of 3. The increase in Standard and Cent Metatrader 4 and 5 accounts is by a factor of 5.

XM is the third brokerage that has officially voiced its concerns about volatility in Japanese yen trading over the weekend. The company has put a cap on leverage at 1:100 (1%) for Japanese yen pairs and 1:50 (2%) for indices.

The changes in the anticipation of volatility events on the part of retail brokers usually result from increased margin requirements on the part of prime brokers.

High leverage is typically used by retail traders to cash in on overnight interest rates. The slow revival of the Japanese yen carry trade has been one of the key aspects of trading since the US Fed lifted rates from the zero bound.

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