Publications
Partners
London - The tumble in equity markets in the past week has boosted the euro, confirming its new-found status as a haven asset.
The 19-nation currency is moving in the opposite direction of the Stoxx Europe 600 Index and the Standard & Poor’s 500 Index by the most in a decade, according to 30-day correlation data compiled by Bloomberg.
The euro has appreciated against all of its Group-of-10 peers in the last three months, including traditional refuge currencies like the Japanese yen and Swiss franc.
As panic selling appeared in global stock markets earlier this week, the single currency rose to its strongest against the dollar since mid-January. The inverse relationship, or negative correlation, has intensified, said Stuart Bennett, London-based head of G-10 currency strategy at Banco Santander SA.
“Given the current level of the equity markets, the euro is under-valued,” Bennett said. “If you are just playing off of European equities, then you could say we should be buying the euro. There is a nice negative correlation if you look at the last year. It’s very strong.”
China’s shock currency devaluation this month sparked a rout in emerging markets that spread across the world and gutted risk appetite. This prompted investors to unwind carry trades funded in euros, which pushed the currency higher. Carry trades involve borrowing in a currency with low interest rates and investing in assets denominated in one with higher rates.
The euro rose more than 7% in a basket of 10 currencies in the last three months, according to Bloomberg Correlation-Weighted Indices. It reached $1.1714 on August 24, the highest since January 15.
At the same time, European stocks lost more than 13%, including their biggest plunge since 2008 on August 24, when commodity prices slipped to a 16-year low amid a one-day $2.7trn global equity wipe-out.
The euro appreciated in recent months even as the European Central Bank pumped roughly €60bn a month of stimulus into the euro system. The central bank could even extend or expand its bond-buying programme if needed, Executive Board member Peter Praet said Wednesday.
“The equation is, stronger currency, weaker stocks,” said Nicola Marinelli of Pentalpha Capital Ltd., which helps oversee €114m of assets at Pentalpha in London. If Europe’s economic fundamentals were stronger “you can have an appreciating currency and a strong equity market,” although this isn’t the case, he said.
“In September we may get the euro to strengthen even more, which is not good for all European equities.”
With the dollar weighed down, and except for the Japanese yen, “where else would you go?” Banco Santander’s Bennett said.
“Emerging markets? No. In the G-10, the Australian, New Zealand and Canadian dollars are low-volume currencies that have been hit by commodity issues and potentially lower interest rates,” so this leaves the euro, he said.
