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For those who are not keeping tabs on the overall performance of each currency, you may be interested to know that the yen was the best-performing currency of the year. I say “was” because the yen’s dominance abruptly and dramatically ended around mid-April, as you can see in the overlay of yen pairs below.

Overlay of Yen Pairs Since Start of Year (Daily Chart)
Overlay of Yen Pairs Since Start of Year (Daily Chart)

However, the yen began to stabilize last week and even staged a major rally this week. So, has the yen finally regained its mojo? And why did the yen lose its mojo in the first place? Well, let’s explore those questions, shall we?

The Yen’s Great Retreat

The yen made a very noticeable U-turn around mid-April. And very interestingly enough, risk aversion was so strong at the time that the Swissy got a bullish boost, even though the SNB (probably) tried to keep the Swissy down.

USD/JPY: 1-Hour Forex Chart
USD/JPY: 4-Hour Forex Chart

So, why did the yen get sold off instead? What’s up with that weirdness? Shouldn’t demand for the safe-haven yen have ramped up, you ask? Also, it’s around this time that Pip Diddy began pointing out in his weekly recaps that the yen’s correlation to bond yields appeared to be weakening.

The very likely reason for the yen’s weakness and signs of decoupling from bond yields is that one of the major sources of risk aversion at the time was the escalating tensions between North Korea and the United States.

In fact, tensions at the time were so bad that queries for the phrase “World War 3” spiked to an all-time high, according to Google Trends.

World War 3 on Google Trends
World War 3 on Google Trends

And remember: Trump just ordered a missile strike on a Syrian airfield to avenge the beautiful babies allegedly gassed by Assad. Fears were therefore high that The Donald would be gung-ho enough to order an invasion of North Korea.

For the beautiful babies!

Also, the carrier strike group supposedly ordered by Trump to go the Korean peninsula was finally making its way towards its objective.

For its part, North Korea warned that “If the U.S. is reckless enough to use military means it would mean from that very day, an all out war.” In addition, North Korea also threatened to sink the U.S. aircraft carrier that was making its way to the Korean peninsula.

Kim

Moreover, North Korea also reportedly tried to conduct missile tests during the Day of the Sun holiday on April 15 and then again on April 28, but both attempts apparently failed.

Overall, a rather dicey situation, especially if you’re a nearby country allied to the U.S. like, say, Japan.

And many market players apparently realized that the North Korea situation will likely erode the Japanese yen’s status as a premier safe-haven currency. After all, the currency of a country that might get nuked in the near future can’t really be called a safe-haven now, can it?

Japanese Finance Minister Taro Aso even openly warned in a speech that “We should always think about what the yen would be like if something happens in North Korea,” adding that the North Korea situation has made the yen’s status as a safe-haven currency “extremely unstable.”

The Yen Stabilized

Worries over the yen’s stability as a safe-haven currency has probably abated. For one, nothing happened so far. No conflict escalation or major military buildup to signal the onset of a physical war.

In fact, there’s likely going to be de-escalation soon (if not currently ongoing) because Trump has already said that he’s open to reasoning together with North Korea “under the right circumstances.”

And North Korea has reportedly reciprocated the sentiment, although mainstream media outlets are obviously more focused on the antagonism between the U.S. and North Korea.

Just political speak and no major, concrete developments on that (so far), though. However, Moon Jae-in’s victory in the South Korean elections could be a real game changer.

As analysts have pointed out, Moon is a proponent of the so-called “Sunshine Policy” which seeks cooperation and closer economic ties with North Korea, as well as avoiding armed conflict and provocations. In short, Moon wants a peaceful path to reconciliation and a potential reunification between the two Koreas.

Will adopting a variant of the so-called “Sunshine Policy” work this time after failing in the past? We don’t really know.

However, it does ease tensions between the two Koreas a bit. And all the more so, given that Moon already sent diplomats to the main players of the North Korean situation in the hopes of de-escalating the, well, situation.

Moreover, Moon has expressed in the recent past that he’s willing to personally go to Pyong Yang “if the conditions shape up.” And earlier today, Trump gave his assent to having a civilized dialogue on the North Korean situation, although Trump also warned that “a major, major conflict” with the North is still possible at this point.

And easing worries over the yen’s stability as a safe-haven currency probably opened the floodgates for yen bulls to charge in. And since there was intense risk aversion and since bond yields plunged hard this week, the yen got a major boost as well. The yen therefore appears to have regained its status as the safe-haven currency of choice. Time will tell if the yen has truly regained its mojo, though, so keep on your toes.