Here is something that I’ve found myself getting into friendly arguments about lately. When money is scared and wants to come out of risk assets, what is the safest place? Where do they go? The easy answers are obviously the US Dollar and US Government bonds right? Some people might say gold. But the math says otherwise. If you look at just the numbers, the winner is by far, the Japanese Yen.
And I don’t know why that is the case. I get asked, “why”, all the time. Not really to worried about the answer. We’ll let the math do the work and answer the more important question of, “what?”.
So when you look at negative correlations with US Equities, the US Dollar Index is actually a plus 0.58 for the month and plus 0.68 for the quarter. Sure it’s at -0.52 for the year, but no where near as high as what you might expect the safest haven to be. Treasury bonds show a nice negative correlation, but again, surprisingly low coming in at just -0.74 for the month. While -0.91 for the quarter is nice and high, the -0.55 correlation with S&Ps for the year doesn’t convince me. Gold has a zero correlation for the month, -0.68 for the quarter, and actually a positive 0.24 for the year. So gold isn’t the answer either.
Which brings me to the Japanese Yen. The clear winner here having a correlation with the S&P500 of -0.93 for the past month. The -0.96 for the quarter and -0.77 for the year makes the Japanese Yen, the highest negatively correlated asset on earth. So does that make it the safest haven?
Think back to 2008 when all hell was breaking loose. Did money flow into gold? Nope, they sold them too. Sold them hard. The “quality” that was being flown towards was the US Dollar, Treasuries, and Yen.
Here’s something else. Sunday night when fear was building and top callers were organizing bear parades, where did money flow right away? What was the initial gut reaction? US Dollar Index was up 0.69% at the futures open. Gold shot up 0.94%. US Treasury Bonds were up 0.73%. But the Yen? EUR/JPY was down 2.3% Sunday night at the open. Euro was obviously where money was feeling from. So where was it fleeing towards? EURUSD was only down 1.17%. So it wasn’t the US Dollar right? It was Yen. In fact, Sunday night at the open, USD/JPY was down a percent.
So this is my math. Am I missing something? The most negatively correlated asset class with US Stocks in the world is the Japanese Yen. When money gets scared, where does it flow to the fastest? Seems like Yen. So as Yen goes, the opposite should be in store for US Equities no?
Just my thoughts. I’d love to hear your comments. And no I don’t want to have a philosophical conversation about fiat currencies, or central banks in Japan. Lets try to keep this about price and intermarket relationships.
Oh yea, one more thing. Keeping in mind the very high negative correlations with US Equities and Yen, here is the recent commitment of traders report from Sentiment Trader showing the Commercials loading up, while speculators are historically short Yen.
Tags: $EURUSD $USDJPY FXY $EUR/JPY $GC_F $GLD $TLT $ZB_F $UUP $DX_F