On Yen & Volatility

Here is my letter to the FT:

Sir, the yen may be bruised by the Bank of Japan's willingness to unleash a monetary shock-&-awe, but Axel Merk's piece (“A Weak yen is not the solution for Japan”, April 18) stating the yen is no longer a safe haven is flawed. Mr. Merk bases his argument by referring to the deteriorating correlation between the yen and the Vix. That is inaccurate on several levels. 

Firstly, the yen's reflexive rallies during sell-offs continues to emerge.  On February 25, the yen rose 2.7% versus the euro and 1.7% against the US dollar (significant moves by FX market standards), while the S&P00 fell 1.8% on the day its biggest percentage decline of the year at the time.  On April 15, the yen rose 2% and 1.4% versus the euro and the US dollar respectively, as the S&P500 plummeted 2.3%, its biggest decline of the year.

Judgements 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% versus the euro and down 13% against the US dollar, while the S&P500 is up 10%. Abut also note that the VIX is up 15% year-to-date, at a time when so-called “risk” markets are 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 the 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%, before assessing the currency flows.