Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

The researchers who wrote a working paper suggesting the yuan isn't as much a haven as the U.S. dollar or the yen are right to say so. Even the offshore version of the currency is subject to the occasional Beijing intervention and isn't nearly as liquid as the other two. Yet, investors looking for a currency to buy when there's uncertainty are increasingly likely to consider the so-called redback as a hedging tool for a simple reason: it's one of the most predictable in times of stress.

Over the past five years, the yuan didn't swing nearly as much as other major currencies during bouts of risk aversion. A look at how 10-day volatility of the yen, the Bloomberg Dollar Spot Index, the euro, the Swiss franc and the yuan behaved in periods when the Chicago Board Options Exchange Volatility Index spiked for several days above 20 indicates the Chinese currency was the least affected.

Going Steady
Since 2011, the yuan was the least affected by a consistent move of the VIX above 20
Source: Bloomberg
* Correlation based on 10-day volatility, with currency data lagging five trading days in relation to VIX spike.

Over the same period, the standard deviation for the currency's daily spot price movement has been 0.13 percent, versus 0.55 percent for the pound (including the recent Brexit vote), 0.84 percent for the Swiss franc and 0.6 percent for the euro. The lower volatility both historically and in the face of risk aversion means that it's much easier to draw expected outcomes in a hedging model with the yuan than some of the world's major currencies.

Tame One
The yuan is the least volatile among major currencies seen as havens
Source: Bloomberg

If the goal is stability and not making money when the world seems to be falling apart, then the yuan pretty much comes up trumps.

The main argument against using it as a hedge is its lower liquidity, which also may help explain why it's less volatile. In the Bank for International Settlements' last triennial survey on currency markets, the yuan ranked ninth in terms of average daily volume, behind the Mexican peso and the Canadian dollar (a new survey is under way and results are expected early September).

Tiny Turnover
The yuan was one of the least-traded currencies among the most liquid ones in 2013
Source: Bank for International Settlements

That's also reflected in the availability of interest-rate swaps -- they're hard to find beyond two years and relatively expensive. Being able to enter or exit a position in a cost-effective way, which is what liquidity provides, is a major consideration for anyone looking for a haven asset.

That aside, the simple fact the yuan is so much tamer than most currencies with high daily turnover means investors should consider it more often. Especially when there's concern anything risky could have a meltdown.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net