Traders Explore Forex Havens As Rising Rates Hurt Bonds

Here’s a quick look at how some of them are stacking up right now.

A place to go?

With interest rates rising across much of the world in response to inflationary pressures, the Chinese market stands out where policy is more geared towards easing and consumer price pressures seem relatively more contained. Yet, even if the central bank maintains an accommodative policy, the offshore renminbi is hovering around its highest level in nearly four years against the dollar.

The currency is one of Asia’s best performers in a year that saw the S&P 500 fall more than 8% and its three-month volatility of less than 4% is well below most major peers .

And unlike many developed markets, it already offers short-term interest rates above 2%, providing some protection not only against more speculative market declines, but also a buffer against the kind of duration risks many investors face in US rates.

Calling all the yen

The yen is a more traditional haven for currency types and while the currency’s spot performance this year may not look spectacular at first glance, behavior within the options market suggests that investors view it as a gamble. insurance.

On the spot side, it traded defensively amid rising Treasury yields and rising commodity prices, but call option costs rose slightly and tipped the smile curve. Option biases shifted sharply in favor of the Japanese currency in late November, shortly after the omicron variant emerged and as Fed officials heightened inflation concerns.

Volatility in yen calls closely tracked rising credit costs in Europe and measures of Treasury market liquidity, suggesting that some participants view Japanese currency options as a hedge against potential turbulence.

go for gold

Gold has long been a safe haven of choice, but it’s far from a perfect hedge. The last few weeks of risk aversion have seen the precious metal once again become negatively correlated with assets like US equities, after spending much of early 2022 moving in similar directions.

Gold prices hit their highest level since June 2021 as geopolitical tensions around Ukraine deepen and measures of consumer inflation in major developed economies beat forecasts, while the Heightened concern could continue to fuel this rise.

For traders, the key finding is that gold strength has always been associated with US dollar weakness, although this inverse correlation has declined somewhat since hitting its highest level in more than a year. decade in mid-2021.

(By Robert Fullem)

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