Some assets are perceived as 'safer' than most during market turmoil, and because of that, panicked investor will seek them in order to reduce risks. However, it is folly if one is to believe it.

In a previous article, we have talked about the myth of safe haven currency. Some assets are perceived as 'safer' than most during market turmoil, and because of that, panicked investor will seek them in order to reduce risks. However, it is folly if one is to believe that such background can maintain a trend for a long period of time. Most notably, there are events when the usual safe haven, that is Gold, Japanese Yen, Swiss Franc, and US Dollar, seemed to lose against another asset.

In the recent market turmoil that came following global stock market fallout after China failed to control its market mayhem, the myth showed its head again.

 

When Euro Wins

On Monday (24/8/2015), Asian and European stock market indices fell on average by 5 percent, while American indices fell around 3.5 percent. Following the fall, EUR/USD gained 300 points to 1.1712, and USD/JPY fell almost 600 points to 116.13. Meanwhile, EUR/JPY also rose up to 138.60 from around 137.50. In addition, there were good economic reports from German and further uncertainty from US the Fed about their rate hike plan. At a glance, the winner overall seemed to be the Euro, and Greenback has lost its lustre as safe haven. Or so headlines around the world said.

Many people seemed to momentarily forgot the fact that key indicators from the Eurozone is still unsatisfactory and that there were no significant improvement yet even after the ECB launched their brand of QE in March. With inflation rate at 0.2 percent in the latest count, they have managed to get out of deflation, but is still on the precipice. Furthermore, unemployment rate in the Euro Area has been stubbornly cling above 11 percent, just one percent below all-time high of 12.10 that was recorded in April 2013. The Greece debt matter too, has not found a sustainable resolve.

On the other hand, uncertainties surrounding US the Fed rate hike plan is indeed alarming, but not enough to say that they definitely will not hike as expected in September 2015. China slowdown and overtly strong Dollar created a less than favorable circumstances for rate hike, but no one said that September hike is impossible. Inflation in the country has improved and job market has tightened. There are still some things that need to be improved further, such as wages, but overall situation seems good. The Fed may not hike rates in September, but it is still possible to be done before the new year. It is very different with Euro area where QE has just been launched and will be ongoing for at least one more year. Monetary policy direction divergence is still on the table.

In short, even though the Euro rallied, it was definitely not because it is considered as safe haven asset. It is more likely to be the speculative side of the market tried to get some advantage amid the turmoil.

 

Market Sentiments

Deeper and more accurate observation on the matter was done by David Rodriguez in a note on DailyFX. He noted that the EUR/USD moved on a virtual tick-for-tick basis with the S&P 500 through 2012, but the correlation has actually turned negative through 2014 and most recently. On the contrary, there was a rise of speculative positions on USD/JPY that has made the Yen upped as much as 6.7 percent in three trading days against US Dollar. So, the winner was, in fact, the Japanese Yen that has been systematically devalued by its government in the last two years. Meanwhile, speculative positions in the Euro remained heavily short. As such, he ended the note with this statement, the US Dollar may regain its appeal as a safe-haven if we see the large overhang of speculative USD-long exposure unwound.

This is a very good event to learn from, as it also shows how speculative positionings influences price movement. Traders who like to follow the news from time to time need also understand that not all headlines are game-changer. In the market where retail traders cannot move prices, it is advisable to check wider market sentiment. In this case, the Commodity Futures Trading Commission (CFTC) weekly report may be a good source.

CFTC

In fact, according to the Commodity Futures Trading Commission (CFTC) report for the week that ended at August 18 (the week before; see graph above). Euro is still the currency with the most short bet against the Dollar, although USD net long positions has decreased. It doesn't necessarily mean that US Dollar is still considered as safe haven at that point, but it signals that wider sentiment is still positive toward Uncle Sam's currency.

In conclusion, if you are a trader that likes to consider fundamental side of the market, then you need to stick with the big picture and not easily swayed by panic. As well, if you trade with technical indicators, be aware that at times there may be abnormal situations in the market that disturb your strategies. At these times, if you are unsure of what exactly happens, then it will be better to strategically covering your back; stay away from the market or tighten your risks so momentary turmoil will not hurt you too much.