Based on logical reasoning one would expect a catastrophic event like this to weaken a country’s economy. However amid the events that took place in Japan, the Yen actually strengthened in comparison to other currencies. What accounts for this? Well, it’s primarily due to one factor:
Safe Haven Currencies-In times of economic distress, market turmoil or natural disasters, investors seek to put their funds in currencies that are stable and secure. Hence the term “Safe Haven”. The major safe haven currencies are the U.S. Dollar, the Swiss Franc and the Japanese Yen.
Effect on the Yen-Due to the earthquake many domestic investors decided to purchase the Yen as a way of a refuge. This brought an influx of Yen back to Japan, an act knows as repatriation. This coupled with the scheduled protest in Saudi Arabia also generated deposits into the Yen, which ultimately contributed to the ascension in price of the currency.
Additional factors affected by the earthquake:
* Oil Futures-Japan is the world’s third largest oil consumer, consuming around 5 million barrels per day. The earthquake shut down several processing plants and even causing major fires. Because of this Oil prices declined to below $100 a barrel since the break a week ago.
To all those traders who believe they know exactly how the market works, this is an example that markets never work the way we always expect them to. This is why it is important to implement “Tight Stop” strategies in case the market changes on a dime. Remember that markets initially tend to overreact to news releases before settling down. We will continue to monitor the Yen and Oil prices.
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