The Japanese yen is gaining steam as fear sweeps the market.
The currency has long been viewed as a safe haven because of Japan’s huge trade surplus and low interest rates. Money traditionally flows away from the country when times are “good” and vice versa when times are “bad.” That’s often made the yen a proxy for bullish or bearish sentiment.
Right now, the pendulum may have swung back in a bearish direction, with the currency up 3 percent against the euro, Australian dollar and Swiss franc. Other “safe havens” like the like the U.S. dollar index (@DX), gold (@GC) and utility stocks (XLU) have also gained, reflecting similar emotions.
Interestingly, a strong dollar typically hurts gold. But now the two are moving in tandem in classic “risk-off” fashion. Meanwhile, “risk-on” sectors like materials, financials, industrials and consumer discretionaries have fallen 9-13 percent.
As highlighted yesterday, the market often behaves like this at moments of fear. Individual stocks may be ignored as traders shift attention to broad instruments like indexes and currencies. This is why correlations increase along with volatility.
Despite the current backdrop, the Japanese yen has done little against the U.S. dollar since the summer. Will it start moving now? Clients interested in watching for potential swings may want to consider yen futures (@JY), which rise when the yen is strong.
Just remember @JY is quoted in the opposite direction as the currency pair USDJPY, which declines when the yen gains.
The Australian dollar (@AD), known for its ties to global economies like China, may also track broader swings in sentiment. It’s trended lower all year and is now trying to hold its lowest level since early 2016.
In conclusion, flight-to-safety trends seem to be at work as the S&P 500 grinds lower. This isn’t a trade recommendation and everyone needs to do their own homework, but traders may want to study some of these patterns with volatility on the rise.