Morning Brief – Decoupling

Morning Brief – Decoupling

Tue 25 Feb 2020



Over the weekend (apparently), we learnt who the king and queen of Winter love island ‘19/‘20 would be. I can only tell you their names by googling it. So I won’t pretend to be a fountain of knowledge on the subject and allow you to make your own searches. One thing I can say is that a lot of these couples made and tested on the ITV hit show and others fail the test of time and decouple pretty fast. With the champions now proud collectors of their £50k prize money and soon to sign their Instagram product placement contracts, ‘tis the season to decouple!


As with most things, the currency market beat them to it. Severe economic and market conditions cause exaggerated movements. Those surviving with the trend tend to be struck from their supposed peers and find their own price path. Some of these are low profile like the de-grouping of South American currencies from their regional or emerging market trend. Others attract more capital and therefore more publicity. I would contend that the biggest decoupling of 2020 so far has been the price of Gold from the value of the Japanese Yen.


As I’ve written about before, the Japanese Yen is a classic safehaven and for a long time has been desired during times of trouble given its track record of relative fiscal profligacy and monetary consistency. As the price and traded volumes of Gold have hit 7-year and all-time records respectively, the value of the Yen has gone the other way, losing as much as 4 Yen versus the US Dollar this year alone. Maybe the Coronavirus is just too close to home for the Yen to be a safe haven? Well I would contend that’s not true: even during the China-US trade conflicts, the heavily exposed Japananese Yen outperformed on haven demand. Instead, the real risk is that Japan, the world’s third largest economy, is staring down the barrel of recession. While the Yen has struggled, other safehavens have pinched a defensive bid and those include the Dollar, Gold and the Swiss Franc, which reached 5-year highs versus its neighbour, the Euro.


As the decoupling stretched further yesterday the global stock market, the sum of the whole world’s publicly listed companies lost a trillion Dollars. A trillion! Beat that Paige and Finn. Ha! Yes, I succumbed to the temptation to google it… Anyway, yesterday’s sell off all stemmed from weekend headlines that the Coronavirus has reached Europe (and Africa) and from WHO admonitions that we could end up with a pandemic. Italy is now the Petri dish for Western capacities to control the Coronavirus – for markets thankfully the outbreak is in Northern Italy which boasts superior medical infrastructure. The Japanese Yen will continue to underperform as a safehaven so long as its economy is under threat. The very characteristics that make the Yen such a haven are threatened by recession and the Coronavirus because, as we’ve already seen from the central bank, monetary and fiscal expansion start to become necessary.




Discussion and Analysis by Charles Porter

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