With the VIX spiking and the yen bid all night and into the US open, it’s probably a good time to ask yourself where the best place to hide is in the event Donald Trump’s inevitable fall from what in his world passes for “grace” ends up materializing faster than anyone figured.
Needless to say, the previously consensus “long USD” trade has now been completely turned on its head with the greenback giving back virtually all of its post-election gains:
And overnight, a veritable chorus of analysts scrambled to remind you that the yen is the preferred safe haven (see here and here) when the world is crashing and burning. Not gold. Not the Swiss franc. The yen.
Well, for those wondering what history can tell us about the relationship between the yen and US equity volatility, Goldman has some useful color for you. More below…
Using the VIX to measure risk sentiment allows us to track how currencies behave in broad ‘risk-on’ or ‘risk-off’ periods – recently the yen has generally appreciated in ‘risk-off’ periods with a rising VIX, while the euro has weakened. While the VIX is based on equity volatility, it tends to reflect broad ‘risk on, risk off’ across assets. In fact, we find the same relationships with our cross-asset Risk Appetite Indicator – a decline in risk appetite tends to support the yen and has recently weighed on the euro. While the ‘risk off’ nature of the yen has weakened since the peak at the end of 2015, it still stands out as the key ‘risk off’ currency, both based on the positive correlation with the VIX and the negative correlation with our RAI (Exhibit 5 & 6). Even gold, which is somewhat similar to a currency, has benefited less from a ‘risk off’ move recently. The Swiss franc has become less ‘risk off’ in recent years.