The Dollar Index at the peak of the Coronavirus lockdown rallied, almost touching 103 – the highest level since 2017. The Dollar index shows the relative strength of the USD to a basket of other currencies. However, a couple of currencies strengthened as everyone was hoarding the USD – The JPY.

 

The U.S Dollar Index

USD/JPY

If the JPY got stronger, why was everyone talking about USD being a safe haven?

The strength in the US dollar was primarily due to market participants selling risky US-based assets such as US equities due to the market turmoil. As investors and traders sold their assets, they were getting paid in US dollars, pushing the US dollar demand. 

 

Why did the JPY rally?

I guess you would call this the “OG” Safe Haven. With the appreciation of the US Dollar relative to other countries but the Japanese Yen, there was a net increase in demand for the Yen relative to the US Dollar. There are many factors as to why the Japanese Yen appreciates during times of uncertainty, with one factor explaining that net demand increase – Japanese citizens’ net foreign assets peaked to 726 Billion in 2019. However, once risk-off events occur, there is a repatriation of those foreign assets (often denoted in US Dollars) bank into their home currency, the Yen. Although Government Debt to GDP is around 230%, Japanese citizens do not share this trait of excess debt. As the New York Times stated, “The Japanese Government is in deep debt, but the rest of Japan has ample money to share.”

 

The JPY Carry Trade

Another reason may be due to traders winding down their “positive carry” trade. In short, by buying a currency with a positive yielding interest rate and shorting a currency with an interest rate less than the currency you purchased, the overnight swap fee is positive. This is because the interest you gain by holding the former currency is less than the interest you pay shorting the latter currency. With the Bank of Japan having negative interest rates since 2016, it has been a popular short for the carry trade with currency with a relatively higher interest rate like Australia. However, in risk off events such as the Coronavirus, positive yielding currencies tend to get their respective central banks cutting rates, making the carry trade less profitable. Therefore, traders cut their positions, which requires them to cut their positions, buying back the Yen they shorted, increasing demand.

 

However, one of the main reasons the JPY appreciated against the USD during peak lockdown was because people believe that it is a safe haven. It does not necessarily matter why it is, only that people believe it is. If you know the relationship between risk-off and the Yen’s appreciation, then you assume it to be true.

 

Correlation between Risk and the JPY

Since the market has generally been risk on/off due to the Coronavirus, it would be interesting to see whether the Yen has played out as a safe haven. If we take 20th March as the start date (peak of the Dollar index this year) and compare the prices of the SP500 and the USD/JPY pair, we find a correlation of -0.498 (~-0.5). This means on average, a 1% increase in the market, there is a 0.5% decrease in the JPY (vice versa). This shows a relatively strong relationship between risk-on and risk-off assets as off late. In comparison, the average correlation between the SP500 and the USD/JPY pair has been around -0.28. 

 

Which is better for your portfolio – the JPY or the USD?

The USD is likely the better choice for your portfolio as this enables you to enter into positions when the time is right. However, it may be worth noting this relationship for swing traders if you want to take advantage of risk on/risk off situations. 

Risk Warning: Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange, you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and, therefore, you should not invest money you cannot afford to lose. You should make yourself aware of all the risks associated with foreign exchange trading and seek advice from an independent financial adviser if you have any questions or concerns as to how a loss would affect your lifestyle.

Recommended Content


Recommended Content

Editors’ Picks

AUD/USD recovers to 0.6300 amid strong Aussie jobs data, Trump's trade talks

AUD/USD recovers to 0.6300 amid strong Aussie jobs data, Trump's trade talks

AUD/USD has found fresh buyers and reverts to near 0.6350 in Thursday's Asian trading. The pair stays supported by strong Australian jobs data and fresh comments from US President Trump on a likely trade deal with China. However, deteriorating risk sentiment could limit its upside. 

AUD/USD News
USD/JPY hangs near fresh YTD low amid rising BoJ rate hike bets

USD/JPY hangs near fresh YTD low amid rising BoJ rate hike bets

USD/JPY holds near fresh YTD lows of 150.46 early Thursday. BoJ's rate hike plan continues to push JGB yields higher, further underpinning the Japanese Yen. Markets weigh renewed US tariff talks, keeping the downside intact in the pair. US jobs data and Fedspeak are next in focus. 

USD/JPY News
Gold price eyes fresh record highs and counting

Gold price eyes fresh record highs and counting

Gold price enters a bullish consolidation phase as Trump’s tariffs affect risk sentiment. US Dollar struggles to hold ground despite hawkish Fed Minutes as US Treasury yields decline weighs. Now gold price awaits acceptance above $2,950 as the daily technical setup favors buyers.

Gold News
Crypto Today: Litecoin, Binance, and Solana dominate headlines as BTC reclaims $97K

Crypto Today: Litecoin, Binance, and Solana dominate headlines as BTC reclaims $97K

The global cryptocurrency market halted a rut of 3 consecutive losing days, gaining 1.6% to hit $3.13 trillion on Wednesday, Bitcoin price promptly reclaimed the $97,000 territory, rebounding 4% from the 15-day low of $93,388 recorded on Tuesday.

Read more
Money market outlook 2025: Trends and dynamics in the Eurozone, US, and UK

Money market outlook 2025: Trends and dynamics in the Eurozone, US, and UK

We delve into the world of money market funds. Distinct dynamics are at play in the US, eurozone, and UK. In the US, repo rates are more attractive, and bills are expected to appreciate. It's also worth noting that the Fed might cut rates more than anticipated, similar to the UK. In the eurozone, unsecured rates remain elevated.

Read more
The Best brokers to trade EUR/USD

The Best brokers to trade EUR/USD

SPONSORED Discover the top brokers for trading EUR/USD in 2025. Our list features brokers with competitive spreads, fast execution, and powerful platforms. Whether you're a beginner or an expert, find the right partner to navigate the dynamic Forex market.

Read More

Majors

Cryptocurrencies

Signatures

Best Brokers of 2025