Research Team at Societe Generale, suggests that the spectacular USD/JPY break triggered a volatility break-out and reminded the market that the yen can also appreciate in a volatile way. Key Quotes “Before Abenomics, and especially before the 2008-2009 financial crisis, USD/JPY skew tended to be very negative, reflecting both the asymmetry of downside volatility risk and an option market distorted by structured products. The volatility regimes show some persistence, but it turns out that an even more lasting pattern in risk reversal is changing. Before 2010, USD/JPY skew was more negative than EUR/USD skew (the yen increased faster than the euro decreased). Between 2010 and 2015, the pattern reversed, with EUR/USD becoming more stressed, notably by sovereign stress and the appearing topside volatility in USD/JPY. Right at the start of 2016, the relative skew between the two pairs switched again, and the risk reversal spread between EUR/USD and USD/JPY is the widest it’s been since 2009. If this indicator remains as persistent as it has been historically, USD/JPY downside volatility is going to stay greater than EUR/USD downside volatility. Therefore, EUR/JPY downside volatility is likely to increase more.” For more information, read our latest forex news.