While trading forex, it’s important to know which currency will appreciate and which will devaluate during turbulent times. The cause of those moves usually ties back to investors’ appetite for risk. When some significant events may undermine financial or regional stability, investors usually cut down their risk appetite and fly for safety.
Frequently in these events, we will usually see appreciations of Japanese Yen and devaluation of euro. Take a recent event as an example, when the US launched a missile strike against Syria, the Yen surged against euro and the EURJPY currency dropped more than 100 pips.
Other recent events can be found and well documented for similar moves. During the financial crisis in 2008, Yen appreciated by more than 20%. During European debt crisis, Yen also appreciated by 10% against the euro.
“When the market becomes rise-averse, money tends to move back home.”
The nature for Yen’s status as a safe-haven currency is driven by several factors. Japan is a major creditor to the rest of the world due to their high export to import ratio. This gives Japan huge account surpluses. When the market becomes rise-averse, money tends to move back home. This will cause assets held by other currencies to be converted back to Yen, and such strengthen the currency.
Another reason is because of carry trade. A carry trade takes place when an investor borrows money from a low interest rate currency and use the fund to purchase a currency to get a higher interest yield. As Yen’s interest rate stays low for nearly 20 years, investors borrows Yen and converted it to other high yielding currencies. However, when uncertainty hits global markets, it can cause investors to unwind their positions and thus Yen will be in high demand.
It is always a good idea to have a good pc of how each currency would react to different global conditions. And knowing this will better help you to trade and manage risk in forex market.