Apr 10, 2016

Are The Currency Markets Telling us that Another Crisis is Brewing?

March is a month or recovery with oil prices trending towards the $40+ after its low of $25 and China's Shanghai Composite index rallying back to 3000 points. All seems to be well and the global markets seem to be readying for a good rally after a 10 months long 20% correction.

However, everything is as rosy as what many of the governments proclaimed or there are more than meets the eye?

One of the key things I look out for while assessing the investment climate is to identify abnormalities in the Global Macro arena and one recent abnormality took me a couple of days to research and analysis before I came to a calculated conclusion.

The abnormality is the divergence of YEN and USD.

In the world of investing, YEN and USD are considered as safe haven currencies, meaning that global investors will tend to move their funds to purchase Japanese Bonds or the US Treasuries before or during times of crisis and they tend to move in tandem whenever a crisis is about to strike. In the last 2 months, there has been a divergence between the two currencies that left me scratching my head. The USD has been trending downwards, meaning that global investors are selling USD and investing their monies in higher risk regions. Meanwhile, the YEN has been shooting higher, despite attempts of negative interest rates and QE by the Japanese central bank indicating a flight of safety which could mean bad news for equities.

Brown Line is Yen. Blue Line is USD

Comparing the trends of European EUR and the Chinese RMB yield no additional clue as to where the Big Boys are parking their money until I came across the chart of Gold.

Gold, the other safe haven currency which I have temporarily forgotten has rallied strongly in the past quarter and with this, the final jig-saw of the puzzle has been clicked into place.

In essential, this is my conclusion:

- The Big Boys are parking their money in safe haven money despite a rally from a 20% market correction, meaning that the worst is not over yet.

- The Big Boys are parking their money in Gold and not USD as per usual as they believe that the global crisis will be strong enough to reverse the US Central Bank decision to stop raising interest rates, or even initiate a new bout of QE.

- The Big Boys prefer to earn negative interest rates from Japanese Bonds, meaning paying banks a fee to safe keep their money, than to risk their money in any higher risk assets shows their extreme adverseness to risk assets at this point of time.

- High gold prices typically points to a potential currency war as government around the world expand their monetary policies (print more money) to boost their exports and economies. China's RMB in the current economic climate will be the potential spark point for a new currency war.

This may be nothing but pure speculation on my part but it seems like the currency markets or the Big Boys are pointing out that the current China and commodity crash is not over yet and there is something big brewing such that they are unwilling to participate in the recent stock market rally.

Invest with caution.


  1. Hi,
    Or these are simply part of the diversified portfolio from various bb or retail? Can we assume that the money inflow to gold or Japanese bond are not all cash from the market?

    1. Sorry for the late reply! The money inflow to gold or Japanese bonds can be a combination of government funds, investment banks, fund houses, ETF which retail and institutions invest in. The institutions typically are the one that are accountable for the majority of the fund flows and when a certain asset class behaves out of the norm, that is when we need to watch out as the big boys are pulling money out from another asset class. The question is always which one.


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