Recent market action in yen/U.S. dollar exchange rate and Nikkei Index has resulted in an impressive surge in CME Nikkei Futures trading. The JPY- and USD-denominated Nikkei Futures are seeing a 50 percent year-on-year increase in trading volume.
As we have pointed out in our research publication, the CME dollar-denominated Nikkei futures is the most liquid listed vehicle for the correlation trade between the index and the foreign exchange. In particular, the early start to the USD-Nikkei futures calendar spread market appears to lend support to the idea.
As of 11:30 am CST on February 12, more than 5,000 calendar spreads in the USD-denominated Nikkei has already traded. This represents a very early start of the roll market (approximately three weeks ahead of the usual roll activities where market participants are rolling their positions from one contract to the next.) The following CME E-quote screenshot shows a very liquid spread market for the dollar-Nikkei. The top of the order book is approximately 1,000 for the bid x 2,000 for the ask and 1-tick wide (5 index points). There is plenty of depth beyond the top level as well.
Figure: CME USD-Denominated Nikkei Futures Spread Market (as of approx. 11:30 am CT, February 12, 2013) displayed on CME E-quote system)
While most of the spread activities have been on the dollar-Nikkei spread market, the spread order book for the Yen-denominated Nikkei is even deeper.
As we’ve written here before, the Bank of Japan has issued rounds of bond-buying to encourage a weaker yen. The Nikkei has responded with a surge, but some of the recent growth can also be traced to solid earnings reports.