As stocks plunged recently due to a stock market glitch, I watched the yen soar that day. I was also reminded of how much the yen feeds off of volatility when I looked over at the Volatility Index ($VIX) and saw how tightly they've been correlated. Check it out on the chart below. (Click on the chart to enlarge it).

When times are good, volatility generally falls or remains low. However, when times get shaky, volatility spikes higher. It's in these "shaky times" that money forsakes the upward trending "carry trades" like AUD/JPY, NZD/JPY, etc. As they get out of these trades that they'd bought, they close them out by selling the pair. Well, when you sell the AUD/JPY for instance, you're selling AUD and buying JPY which closes out the trade all together.

This huge buying pressure happens when trades are exited and causes the yen to actually feed off of the volatility and it ends up becoming the yen's friend.

I don't know of many financial assets out there that thrives when things get shaky and volatile but one thing's for sure...the yen does!

Sean Hyman
Editor, Currency Cross Trader
www.worldcurrencywatch.com