When it comes to havens among currencies, the yen is the safest of them all, according to a correlation analysis by Goldman Sachs Group Inc. economists.
Japan’s currency aligns most closely against corresponding moves in global risk assets in the past decade, Goldman economists led by Kevin Daly wrote in a report on Monday. They compared daily and monthly fluctuations for a basket of 28 global, floating, developed and developing market currencies across two five-year periods from 2007 to 2011 and 2012 to 2016. The yen showed the most consistent negative correlation to global stocks, U.S. oil prices and 10-year U.S. Treasury yields.
“The yen is the most ‘safe-haven’ of ‘safe-haven’ currencies, with the Swiss franc and U.S. dollar vying for second place,” the Goldman analysis found. “At the other end of the spectrum, a number of different emerging-market currencies vie for the title of most ‘risk-on’ currency. These correlations appear relatively stable over time, with the notable exception of some of the U.S. dollar’s relationships.”
For example, the negative correlation between the dollar and oil prices was weaker in the 2012 to 2016 period compared with the first, the economists said. This suggests either the prior relationship between the two was unusually strong immediately after the 2008 financial crisis or it reflects the U.S.’s rising oil self-sufficiency.
Also among the findings:
- The Mexican peso, South African rand, the Canadian and Australian dollars are the most consistent risk-on currencies.
- Correlations between currencies and 10-year Treasuries tend to be positive except for the yen.
- However, when controlled for the other two variables, many of those relationships turn negative.
- That suggests the underlying reasons for a climb in yields is key to understanding the exchange-rate response: increasing yields driven by improving optimism is supportive for risk-on currencies, but a “pure” increase motivated by, for example, an inflation shock, is negative.
- Overall relationship between exchange rates and equity returns via MSCI All Country World Index were much stronger on a daily basis than for monthly, opposite true for correlations to West Texas Intermediate crude.
- When oil prices rise, currencies from exporters including Canada, Colombia, Russia tend to outperform; yen, dollar and franc tend to underperform.