Two stories are dominating the media today; the Apple warning and the JPY related FX flash moves overnight. It is amusing to hear pundits talk about these FX moves, especially as it seems few have ever traded markets in their careers.

They are all either blaming Apple or the Japanese retail investor (on holidays still).

Apple versus JPY is not an overly corelated “pair”. Below charts showing the non-normalized spread over past 5 years.


The move in the JPY versus the USD extended to a max level of some 3.6%. The move in the JPY versus the AUD and the Turkish Lira was much greater, 8 and 10% respectively. Pundits are blaming the Japanese retail investor for this move, but this is (another) non-logical argument.

One of the charts presented is the below chart that shows how the Japanese retail investor has loaded up on AUD longs leading into this last flash move, but this accumulation has been going on for a long time, i.e. nothing new.

The same holds for the people explaining to us Japanese retail has loaded up on Turkish debt. It is true, but why on earth would these retail investors suddenly all decide exciting their positions while they are on holidays (Japan is still closed) and it is 7.30 in the morning local time?



What people (still) don’t realize is that markets are partly broken.

Moves like the ones we saw last night or the real flash crash in US markets back in 2010 are just a function of the HFT algo driven markets these days. Blaming Apple or the Japanese retail investor is amusing, and shows only how extremely bad the financial media continues to be.

The JPY vs the USD moved some 3.6% during this flashy move. The big range (1115/105) seems to continue. We have no real take on where this FX is going from here, but we surely did warn for the JPY weakening momentum a few weeks ago, and how and why it is of such importance as a global risk indicator.

It is partly “sad” global risk is repriced as algos hit the illiquid moments of the JPY.


Blaming the Apple (the first chart shows there is no correlation between Apple and the JPY) profit warning and the Japanese retail investor for the JPY moves is basically saying the entire market is wrong in how it prices the moves (implied volatility).

Leading into the JPYUSD overnight move, the 1-month ATM implied volatility for the pair traded at some 8.5%. We are not going to derive it here, but volatility is directionally proportionate to the square root of time, so a 1% move in an asset translates to approx. 16% implied volatility. Implied volatility of 8-9%, like the one we saw in the JPYUSD vol, was pricing some 0.5% daily moves for the JPYUSD.

So, the pundits are basically telling us that either the Apple profit warning or the Japanese retail investor, made JPY move 7-8 times more than what the options market priced, without any macro events having taken place. That is naïve. The JPYUSD implied volatility has shot up higher post the moves we saw, but is still trading at 10%, pricing some 0.6% daily moves for the pair. There is still no good option valuation formula that takes into account the sudden liquidity vacuum.


Global FX markets (dominated by the big pairs) have over past years been churning 5-6 Trillion USD as an average daily turnover. Blaming Apple or the Japanese retail is simply amusing.

Just face the facts, algos continue to dominate the financial markets. Elevated volatility and low liquidity will trigger algos and badly places stops, causing further moves in various assets.

Trade accordingly.


Source; charts by Bloomberg and BIS