Should you buy or sell the JPY amid the steepest fall in two decades?

The Japanese yen is free-falling, as reflected by the USD/JPY exchange rate moving above 131. This is the steepest fall in two decades, but it is not the first time when the Bank of Japan (BOJ) has triggered such wild moves in the FX market.

The key to interpreting the Japanese yen is to put into context what happened in the last ten years since the Bank of Japan initially started to buy government bonds. After the announcement back in 2013, the Japanese yen fell dramatically all over the board.

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The size of the quantitative easing spooked investors, and many viewed the doings of the  BOJ as an experiment that won’t end well. Fast forward to 2022, the USD/JPY exchange rate reacted to Trump’s election when it advanced in a correlated fashion with the US stock market.

But something broke with the COVID-19 pandemic. Moreover, the divergence between the USD/JPY and the US stock market reached extreme levels after this year Russia invaded Ukraine.

Is the Japanese yen a safe-haven currency anymore or has it lost its status?

For many years in the past, the Japanese yen was viewed as a safe-haven currency. Effectively, it meant that it reacted to risk-off and risk-on market events.

However, a close look at the monthly chart above reveals that the Japanese yen acts as a safe-haven currency only in times when it consolidates. When the BOJ changes the monetary policy or announces something new, the yen decouples from the risk-on/risk-off market moves.

The Russia-Ukraine war was a risk-off event. But instead of appreciating, the Asian currency did the opposite.

The explanation comes from the BOJ’s decision to keep the policy loose while other central banks started to raise the interest rates. As such, the key to interpreting the charts and the future market direction is to analyze the price action since the start of the COVID-19 pandemic.

Is a reversal in the cards? Currently, no.

Traders looking for a reversal may want to wait for a “proof of life” first and act second. Such a proof would be a drop to 127 – a pivotal level as this is where the market bounced from after trading close to 130 for the first time in many years.