First, the yen's reflexive rallies during market sell-offs continue to emerge. On February 25, the yen jumped 2.7 per cent versus the euro and 1.7 per cent against the US dollar (significant moves by FX market standards), while the S&P 500 fell 1.8 per cent on the day, its biggest percentage decline of the year at the time. On April 15, the yen rose 2 per cent and 1.4 per cent versus the euro and the US dollar respectively, as the S&P 500 plummeted 2.3 per cent, its biggest decline of the year.
Judgments may be clouded by the fact that equities have not been subject to any real test by the bears. Thus, year-to-date, the yen is down 12 per cent versus the euro and down 13 per cent against the US dollar, while the S&P 500 is up 10 per cent. But note that the Vix is up 15 per cent year-to-date, at a time when so-called “risk” markets are also higher.
These episodes clearly highlight the Japanese yen retains its safe-haven lustre during intraday and intraweek sell-offs. One reason is that the US dollar cannot solely and continuously assume the role of safe-haven currency at a time when neither the majority of Federal Reserve members, nor US data support the case for reducing asset purchases. Also, investors use currencies as vehicles to get in and out of risk-taking endeavours. Forced liquidations are increasingly frequent during overstretched markets and a rising yen is unavoidable. Most of all, it is premature to claim the end of the yen's safe haven. Let's wait until markets dare to decline by at least 7-10 per cent, before assessing the currency flows.