Gold Breaks Away From Emerging-Market Currencies

(Bloomberg) -- Emerging-market currencies and gold are moving in opposite directions for only the seventh time in the past 12 years.

The precious metal has rallied 20% this year as concern over trade tensions and slowing global growth spurs its haven appeal. Meanwhile, the demand from carry traders for developing-nation currencies has faded, dragging the benchmark index down 1.6% in 2019.

That has sent the MSCI Emerging Markets Currency Index to the lowest level since March 2013 relative to gold. The usually positive correlation between them has turned negative.

Given gold’s utility as a hedge against uncertain times and the appeal of emerging-market currencies to yield chasers, one would expect the two assets to move in opposite directions most of the time.

But investors trade them together as dollar-denominated investments. That means any gain for the U.S. currency prompts losses in both simultaneously, and vice versa. The correlation coefficient between gold and currencies often reaches 0.5 or higher.

Even when the relationship turns negative, it’s usually short-lived before a positive correlation reasserts itself. On the past six such occasions, the longest the negative correlation lasted was three months.

Investors may now wait to see when emerging-market currencies and gold move in the same direction again. That’s a milestone worth watching because on five of the past six times the turnaround happened, emerging-market currencies posted a gain in the ensuing six months.

From that perspective, and subject to the multitudinous factors in markets, a return of the positive correlation may herald a rebound for the currencies.

To contact the reporter on this story: Srinivasan Sivabalan in London at ssivabalan@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Robert Brand, Alex Nicholson

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