In the midst of all of this market turmoil, our old friend during risky markets - the Japanese yen - is still rising. You can pair this gem with almost any currency in the world right now - especially the British pound.

The Japanese yen has been beating out every single one of the top 16 or so currencies. So this is the biggest place that money is running to right now.

Why is this happening? It’s not that Japan’s economy is so strong. In fact, Japan may be entering into a recession as we speak. So what’s going on? In the past, as stock markets grew strong and volatility stayed out of the markets, investors around the world bought high-yielding currencies with borrowed money in the lowest yielding currency in the world, the Japanese yen (0.5%).

Many of these currencies reaped 6-8% a year. As an investor, all you had to do was pay between zero and one half of 1% if you borrowed yen. When you add a bit of leverage to these positions, you reap even greater returns just by borrowing low and reinvesting those funds. This strategy worked for years during calm, cool, and collected financial markets.

However, as we know…since about a year ago, the markets have taken a turn for the worse. We’re now in a high-risk, volatile market. That’s obviously not conducive to this type of currency investing called “carry trading.”

So as these positions are closed out (or as they say in the industry - unwound), they sell the higher yielding currency like Aussie or New Zealand dollars or like the euro or pound and have to pay back that loan of yen. When they do this, they are “buying back” yen which causes the yen to pop up.

It’s almost like a short-seller in stocks covering his short-sell by buying back the shares to close the position out.
Long story, short: As long as the turmoil lasts, the yen will prosper. Traders will continue to unwind positions as many are either margin-called or flat-out scared out of their positions.