Is it safe to buy the JPY pairs in times of financial turmoil?

Let’s start with the conclusion. The short answer is no.

The JPY pairs have historically correlated with a risk-on/risk-off environment. More precisely, they moved in a direct correlation with the US stock market. It means that higher stock prices triggered weakness in the JPY and strength in the JPY pairs.

So when things go bad, like the recent troubles in the US banking system, stocks tank and JPY pairs too. Therefore, in general, buying JPY pairs in times of financial market turmoil is not wise.

However, last year things changed. Perhaps it was the result of the pandemic or the fact that the Bank of Japan did not change the interest rates and preferred to cap the government bond yields. Who knows?

The direct correlation of JPY pairs with the US stock market changed when the USD/JPY crossed above 116. It rallied to above 150, without US stocks rallying.

Until recently.

In the aftermath of the bank failures in the United States, the stock market tanked, and the JPY pairs followed. For example, USD/JPY dropped from above 137 to 132 area.

Stocks look to rebound today. Will the USD/JPY do so too?

USD/JPY is back tracking the US stock market

Negative headlines regarding the financial system’s stability dominated the first half of March. Memories from the 2008-2009 Great Financial Crisis made traders sell their stocks, viewed as risky assets.

One curious development in the last two weeks is the direct correlation between the USD/JPY and the US stock market. If it is a new theme we’re observing in 2023, then any rebound in the stock market means a bullish development for the JPY pairs.

If that is the case, we are back in a risk-on/risk-off environment. Under such conditions, the best pairs to trade are the JPY crosses (e.g., EUR/JPY, AUD/JPY), because they will benefit from positive flows from both the strength of the USD/JPY and the US stock market.