You are not logged in.

#1 13-10-2021 18:32:46

Admin & Trader
From: Paris - France
Registered: 21-12-2009
Posts: 3176

USD/JPY: what happened to the JPY's reserve currency status?

USD/JPY: what happened to the JPY's reserve currency status?

The weakness of the Japanese yen has been one of the dominant themes this year. Has the yen lost its safe haven status?

One of the basic concepts of currency trading is that certain currencies have a safe haven status. In effect, this means that investors sell foreign assets in times of crisis, frightened by the turmoil in the markets.

The direct consequence is the appreciation of the local currency. For example, Japanese investors sell U.S. stocks during the market turmoil and convert the proceeds back into the local currency - the Japanese yen. Once the crisis is over, they invest in U.S. stocks again, selling the yen and buying the dollars needed to pay for the stocks. This is how "risk-on" and "risk-off" trading works - a rise of the USD/JPY in bullish stock markets, a fall of the USD/JPY in bearish stock markets.

But this concept has recently been undermined. In fact, it has been flawed for some time now, and for this reason, traders should pay special attention to the decline of the Japanese yen in 2021.

Japanese investors bought a record number of foreign assets during the last two crises.

While safe-haven status remains an argument for many yen traders, the reality is quite different. Not only did Japanese investors not sell their foreign assets during the last two crises, but they invested heavily abroad, as shown in the chart below, which shows net purchases of Japanese stocks abroad.

Therefore, the strength of USD/JPY in 2021, and thus the weakness of JPY, should be taken with a grain of salt. U.S. equities have not moved in the past six months, while the USD/JPY has risen like there's no tomorrow. Such a divergence rarely goes unnoticed.

"Anything worth having is worth going for - all the way." - J.R. Ewing



Board footer