Bags-currencies and commodities dancing together: returns the binary market in which money is almost impossible

There is the risk so, risk off: mind the big picture, not the details

The Brexit and the Fed are all that moves all world markets

There are only two asset classes, risk or a shelter, which go hand in hand

The foreign exchange market is the last of the major markets that stopped moving by itself. Instead of swinging on economic data and monetary policy, emerging currencies dance to stocks and commodities, and its highest correlation since 2013. For example, if the stock falls, it is virtually certain that the yen will rise, and vice versa.

This model is not new, and is known by traders as exposures to risk off. What does that mean? Simply divide the financial markets into two categories, one asset class are considered safe (they are shelters) and the other class are risky assets. And all dependent assets move: if the risk-on mode is enabled, the perceived risk is low and active as the bags up, which automatically implies that assets and insurance shelter down. And in the other direction.

It happened after Lehman

It is not the first time it happens, for example took place at the beginning of the financial crisis in 2008, when the collapse of Lehman Brothers did all the rest does not matter. Now, once assumed the effects of extraordinary global monetary policy is repeated, and the only thing that matters is the general feeling about local perceptions. In other words, it only matters if there is fear or not.

As David Bloom, head of currency strategy at HSBC, says this makes life more complicated for managers. "We have moved from a world of monetary stimulus from central banks in the world of risk on, risk-off. Today is a risk off environment."

This new peak in the correlations between currencies, bags and commodities came after the turbulence and crashes earlier this year. These links have been strengthened with investors who see a lot of stones on the road, in particular the referendum on the permanence of the UK in the European Union next month and expected increases in interest rates by the Federal Reserve and the US elections in November.

This resurgence of the binary market is already affecting investors, and the trend may be reinforced by decisions coming from the Fed. After the final minutes of the central bank and the statements of some members of the US monetary authority, up type seems closer than expected by the market, which was extended to bags and emerging currencies.

"There is a terribly thin line between that rate increases are a sign of economic health in the US and are the trigger for a new round of risk aversion, particularly in emerging markets," said kit Juckes, strategist at Societe Generale. And like a bit market, "could cause the traditional flight of money into the yen for housing," he added.

Increasing correlation

Bloomberg data show that the correlation 120 days exchange indices and emerging global stock markets is 0.6 points close to the level of April 8, when the reading touched highs since 2013. Since reading of 1 means total correlation, the data show that it is more common that currencies move in line with the bags otherwise.

The correlation of commodity currencies this month hit 0.7 at the highest level in six years. In late 2014, however, no stock or commodities had a significant correlation with the currencies.

"There is no doubt that the risk of game on, risk-off is back in fashion," said Chris Scicluna, head of economic research at Daiwa Capital Markets. "We found that even in the first quarter was a period of intense risk-off". However, Scicluna warned that central banks still have ammunition and can not give by finished its ability to influence the market.

Yen, dollar and euro

More important is the correlation between the yen-dollar and shares, which reached 0.7 in February, the highest since Bloomberg began calculating this indicator in 1987. This means that necessarily the Japanese currency tends to depreciate against the dollar when stock markets go up. And as we are in a binary market, otherwise, to rise when stocks fall.

the influence of the binary market exchange rates increased with the financial crisis, when investors became hypersensitive to market shocks. The measures of central banks unprecedented removed from this influence to support the stock market and government bonds (a classic refuge in times of distress).

The currency correlation with the perceived risk may change. The euro, for example, traditionally move in line with the bags, especially since the outbreak of the debt crisis in the euro zone in 2009. However, earlier this year was established as a safe haven, to assess whether global stock markets fell, a status that has only temporarily lost when the ECB introduced a new stimulus in March.