The best/worst of the rest
Chandler says the strength of the Japanese yen has been befuddling policy makers, investors and observers. It often is claimed to be a safe haven, even though the country does not have a triple-A rating, has a debt-to-GDP ratio of more than 200% and continues to be plagued by deflation.
But Chandler suggests the safe haven and carry trade claims for explaining pre-crisis periods of weakness for the yen have not been examined closely. He says there are no signs that foreign investors have stepped up purchases of Japanese financial assets to back up the safe haven theory.
“Judging from currency futures, speculators also cannot be cited behind yen strength,” he says, noting that the gross long position as of the week ending July 17 was a modest 36,700 contracts. In early February, speculative gross positions were more than 85,000, a multi-year high, but they then fell to a multi-year low near 1,000 by the end of March.
“Japan is no longer the low interest rate country,” Chandler says. He adds that Japanese investors are continuing a strong preference for foreign fixed income investments over equities, with the recent four-week moving average of foreign portfolio investment near a two-year high.
Popplewell says that the yen and Swiss franc no longer are being relied upon for safe haven positioning. “The Swiss is tied to the euro at its 1.20 [peg], so the market cannot play that as a safe haven go to,” he says (see “No vacancy,” below). “With regard to yen, the market is very worried about the Ministry of Finance and the Bank of Japan,” which have been vocal and increasingly adamant about intervention in their currency.
Such intervention would have a negative portfolio impact, Popplewell says. He adds that “strapping on yen is somewhat of a dangerous scenario short-term” and that buying dollars remains more of a prudent play.
Analysts and traders say the so-called “commodity currencies” are now less tied to commodities than to overall world growth trends. “There’s a correlation between Canadian dollar, crude oil and the S&P or the Australian dollar and crude, although Australia is not a major exporter of crude,” Spivak says.
“Commodities have been keeping us on the defensive,” Floyd says, who notes that a weaker euro, weaker Aussie and weaker S&P all go together.
“If you can gauge with a high degree of certainty where the S&Ps are going vis-à-vis commodity prices — they tend to lead — it helps set us up in the currency market because all of these asset classes are closely tied. It’s what we call our version of intermarket analysis,” he says.
Floyd adds that the Turkish lira and Singapore dollar also are among safe haven currencies at times when the euro’s correlations against other major asset classes break down. “They’re not as impacted sometimes by the winds of the S&Ps and other major asset classes that drive currencies,” he says.
There are few true safe havens and fewer countries who want to take the import hit of a stronger currency.