In case you haven’t noticed, the haven appeal of the euro is growing. Ditto for the yuan.
As far as the latter is concerned, we’ve been characterizing the yuan as a high-yielding haven for a while and indeed that point seems to come up at least twice a day. We were dead right when, on August 10, we described the yuan as the market’s new have asset but we were dead wrong to say you had missed the rally.
Because despite being overbought at the time, the onshore yuan marched to its best month since revaluation in August and the offshore yuan would go on to post a record breaking, 14-day win streak against the dollar – a streak that looks like it will come to an end on Tuesday.
This is of course all down to the fact that China is promoting stability in the lead up to the Party Congress and it’s helped along by tighter capital controls, a soaring stock market, and an economy that refuses to roll over in earnest. The result: a near 16-month high for the yuan:
And then there’s the euro. This is all down to policy convergence with the U.S. and relative political stability. Yesterday, we described the “then-and-now” juxtaposition between December 2016 and where things currently stand as follows:
Part and parcel of [euro strength] is the fact that what started the year as a policy divergence theme (Fed tightening, U.S. yields rising on assumed reflationary momentum from Trump’s agenda set against a patient ECB that’s starting from behind anyway), has morphed into a policy convergence theme (Trump agenda priced out, Treasury yields at or near YTD lows, Fed hamstrung by fiscal gridlock while incoming data in Europe firms up, etc.).
The result: a euro that’s the strongest since January 2015:
That’s the backdrop against which you should consider the following piece from Bloomberg’s Mark Cranfield amusingly called “Currency Havens for Millennials”…
The present crop of foreign-exchange traders isn’t demonstrating the same reflexive instinct to grab for U.S. dollars in a crisis that previous generations have shown and that’s reinforcing the currency’s structural bearishness.
- In recent years the yen has pushed king dollar part of the way off its throne and now the euro is also squeezing into the picture. In Asia, the yuan is establishing its own credentials as a haven.
- The performance of the euro through this year’s multiple North Korean missile launches is in stark contrast to the Greek crisis when its very future as a currency was in doubt. Tellingly, the euro has barely lost any value against the Swiss franc recently, despite North Korea’s nuclear test. Even speculative media stories about the return of the Deutsche Mark have largely disappeared.
- Despite Brexit — or perhaps because of it — Europe is showing a level of political unity between France and Germany not seen since the days of Helmut Kohl and Francois Mitterrand. The pairing of Emmanuel Macron and Angela Merkel certainly looks sturdy compared to the fraught relationship between Donald Trump and his Republican Party colleagues, and that’s positive for the euro as a refuge.
- This year has also witnessed the emergence of the yuan as an intra- Asia haven of choice during the various short-term eruptions of North Korea-related angst. There is a lot to prove before the yuan has long-term haven status, but it will be a tag that fits as China’s financial markets reach maturity.
- On the flipside, the share of global reserves kept in dollars is likely to shrink over time, as my colleague Mark Cudmore has discussed recently, and that’s likely to mean a less bullish currency in times of trouble.
[USD accounts for 64.5% of global FX reserves (as of end of 1Q 2017). And yet the U.S. only constitutes 24.6% of the world economy (as of end 2016) and that share is inexorably shrinking over time.]
- Don’t count on the dollar being the go-to destination for investors when the next global financial crisis hits. Sure, they’re unlikely to seek shelter in Bitcoin and other cryptocurrencies just yet, not even Millennials. But they may well prefer a haven basket that includes more yen, euro and yuan.