EUR is a safe haven?

USD asymmetry

The USD continues to struggle even as US equities rebound. The asymmetry to the correlation is glaring.

And while the EUR trades somewhat like a safe haven of late on equity selloffs, it doesn’t sell off much when equities rally. Even EURAUD, which has historically (and recently) served as an excellent proxy for risky assets, remains a tad firm on this last leg of the equity rally.

You may have noticed I said, “EUR trades somewhat like a safe haven of late” and that is a new property for the European single currency. Historically, it mostly traded more as a low-beta risky asset, not a safe haven.

In other words, in the past, when the S&P 500 sold off aggressively, EUR went down a bit, AUD went down a lot, and EURAUD shot higher. Post Liberation Day, large S&P selloffs have been the result of foreign exits from US assets, and EURUSD has gone up. Here is the history of some safe havens and purported safe haven trades over the past 15 years. I screened for the worst days for the S&P 500, finding the 10% of days that were the worst. This means I screened for all S&P 500 down moves of 1.1% or more, because that’s how you get to 10% of all days. Here are the results, showing the cumulative standard deviation moves over time.

Takeaways:

• The red line is EURUSD. Note how it flicks higher of late. While it might look like a blip, it’s a fairly meaningful change of behavior. The only other times EURUSD traded higher on SPX weakness were the first wave of COVID, and some weird behavior in 2015/2016 when German yields went negative.
• The orange line is EURAUD. Note its consistently orthodox behavior throughout the post GFC period. It’s a good proxy for risky assets.
• The purple line is gold. It is not a reliable safe haven. It sometimes trades like a risky asset or liquidity thermometer and sometimes trades like a safe haven. You can argue it’s a safe haven from a portfolio point of view due to its lack of correlation and so on, but judging purely by how it trades during equity downdrafts, it doesn’t qualify as a short-term port during equity storms.
• The yellow line is bonds. They have not been a good safe haven post-COVID because inflation has been high.
• The green line is bitcoin, and the dark blue line is silver. They are risky assets.
• The cyan line is EURCHF. It’s an OK safe haven with a strong downtrend due to capital flows.

This is not immediately actionable, but good forecasts first require good explanations of how and why markets move.

I think the switch from US dollar to EUR as the global safe haven currency of choice is real. As trust in US deficit credibility and confidence in US economic policy evaporates, the big down days in stocks will be rotation out of US assets and US dollars and into other large, stable capital markets like Europe. In 2011, it was popular to describe EURUSD as two garbage trucks colliding. The European garbage truck is now a bit spiffier than the American one. Europe will issue cartloads of new debt, which can be good for the currency given the low starting point of debts in Germany. And then maybe you get Joint EU Defense bonds one day and that further cements the EUR as a place to park sovereign wealth.

Final Thoughts

1. Out just now: *LEAVITT SAYS ‘HOSTILE’ ACT BY AMAZON. Aggressive government intervention in the economy such as this is a major reason I think capital will continue to flee the US regardless of tariffs on / tariffs off. Much as China was deemed uninvestable when they were deplatforming tech bosses… The US government picking winners (TSLA, ORCL, etc.) and threatening companies that don’t toe the party line (CBS, Amazon, and JP Morgan) makes for a hostile investment climate.
2. I am excited for the Kentucky Derby. Already have my picks ready and maybe I’ll write a short section on it Friday, just for fun. Maybe I should check with compliance first.
3. Some tentatively good news to report. US drug overdose deaths are starting to come down after spiraling higher during and after COVID. Isolation is kryptonite for addicts.

https://www.cdc.gov/nchs/nvss/vsrr/drug-overdose-data.htm

Have a fanatically joyful day.

The Spectra FX Positioning and Momentum Report

Consolidation

Hi. Welcome to this week’s report. Positioning has come off the boil a bit as time passes, price consolidates, and options decay.

Canadian Liberal leader Pierre Poilievre lost his Carleton riding seat to Bruce Fanjoy after holding it for 21 straight years.

There were 91 candidates on the ballot in that riding. Most of the candidates got less than 50 votes. Here are the top 22 finishers:

good luck ⇅ be nimble