After last week’s conjecture about the many ‘fear gauges’ being eerily quiet, we have finally seen risk aversion in full effect this afternoon. This has shaken the markets out of its VIX torpor with gold up, treasury yields off and a very strong yen.

Investors are worried about ‘another’ crisis which has hit the new Administration and President Trump. Along with revelations about him sharing confidential information with the Russian foreign Minister, we now have the suggestion that the President urged former director Comey to drop an investigation into former NSA director Flynn. This latest development has left investors increasingly concerned that the political controversy will hurt the President’s ability to push through his reflation policies.

The VIX, yes that ‘fear gauge’ has finally popped higher with its largest increase intraday since November 3, just before the US election of course. The dollar index conversely is at six-month lows and now well below its 200-day Moving Average. With US 10 yields also dropping 5 basis points, this environment of broad-based risk aversion is perfect for the yen to strengthen.

We can see on the USD/JPY daily candle chart keys levels over the last year. The pair got above 118 at the start of 2017 after the Fed hike and Yellen’s testimony. We then drifted lower to 115.00 just before the ‘dovish’ hike and before making a low of 108.13. From mid-April, we’ve had a risk on retracement which took prices very close to the 61.8% Fibonacci retracement of the December-April high-low around 114.64. This level actually formed a ‘classic 2 bar reversal’ pattern with the second bar clearly rejecting the first thrust.

(Click on image to enlarge)

USD/JPY Daily Candle Chart

USD/JPY has come off this level aggressively from trading just above 113 earlier today. 113 was also critical as it represents a number of key Fibonacci levels. Such a critical break of resistance levels has resulted in a sharp sell-off today breaking through 112 to reach 111.51.

So what will be interesting from here is if President Trump is able to ride these allegations, as he has done previously and fight back the strengthening tide of unrest. If not, then we are likely to see the 5-week retrace move as simply a further continuation of the downtrend from December last year. In which case 108.13 will again potentially come on to trader’s radars, especially if the soft patch of US data becomes something more than ‘transitory’.