Euro Is the New Yen as Correlation Hits 8-Year High on Haven Bid

  • Both currencies heading for monthly gains of about 2%
  • Haven assets have benefited from uncertainty about China, Fed

The euro is trading more and more like the yen.

The common currency rallied this month with Japan’s tender, a traditional refuge, amid uncertainty about the severity of China’s economic slowdown and when the U.S. will raise interest rates. The correlation between the two rose to its highest since early 2007 following last week’s global stock rout.

“What a lot of investors have forgotten is that historically the euro has been a safe-haven currency,” said Bipan Rai, director of foreign-exchange strategy at Canadian Imperial Bank of Commerce’s CIBC World Markets unit. “We’ve had a shock coming out of Asia in terms of the Chinese devaluation and, in those sort of situations, you tend to see flows move toward more safe-haven currencies.”

The euro rose 0.2 percent to $1.1211 as of 5 p.m. in New York, taking the single currency’s increase in August to 2.1 percent, its best month since April.

The yen strengthened 0.4 percent to 121.22 per dollar. The Japanese currency gained 2.2 percent in August, its biggest advance since January 2014. Markets in London closed for a national holiday on Monday.

Shorts Cut

As traders try to anticipate when the Federal Reserve will raise rates for the first time since 2006, China watchers are pondering whether the Asian nation can engineer a soft economic landing.

The euro and yen have outperformed other haven currencies, such as the Swiss franc and the U.S. dollar, over the past month, according to Bloomberg Correlation-Weighted Currency Indexes. The correlation between the two rose to 0.64, where a reading of 1 would indicate the two moved in lockstep.

“It makes sense,” said Elsa Lignos, a senior currency strategist at Royal Bank of Canada’s RBC Capital Markets unit in New York. “If you look at the way markets trade during risk aversion, people tend to lighten up on positions. That means currencies where positioning is very crowded, very short, tend to outperform.”

A short position is a bet a currency will weaken. Wagers against the euro peaked in March, before sliding to their least since July 2014 last week. Hedge funds and other large speculators reduced their bearish yen wagers in the week to Aug. 25 to the lowest in more than three months.

Fed Timing

In the U.S., manufacturing and employment reports due this week may help Fed policy makers decide whether the domestic economy can withstand higher interest rates.

American companies hired 218,000 workers in August, economists forecast a report on Sept. 4 will show. Fed Vice Chairman Stanley Fischer on Aug. 29 indicated policy makers are open to increasing borrowing costs next month.

“The risk factor will remain a big driver of the foreign exchange markets,” said Thu Lan Nguyen, a foreign-exchange strategist at Commerzbank AG in Frankfurt. “Against this background, the euro and the yen will continue to be the main beneficiaries of the rise in risk aversion. They are currently seen as the ultimate safe havens.”

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