Euro is the new safe haven for European stocks

In recent past we have been arguing that Euro might be acting as a safe haven currency as massive policy easing from European Central bank has given it some characteristics of a safe haven currency.

As of now, European Central Bank (ECB) is pumping liquidity at an average pace of € 60 billion per month, which has pushed yields in deeply negative in the short term. German 2 year bond yield has been hovering below -0.2% for quite some time.

This week, as China devalued Yuan, German 2 year yield has fallen to record low and Euro rose in spite of the falling yield against Dollar, suggesting that there might be some safe haven links, since at one point this week, German DAX was down more than 5%.

In this article, we tried to review this safe haven link of Euro via its correlation with stocks.

Analysis:

• The correlation showed in the chart reveals close links between European stocks and Euro, which further reveals that Euro might be acting like safe haven, given its high current inverse correlation with German DAX and EuroStxx50.
• Euro's 15 day correlation with DAX stands at -83% and it is -80% for EuroStxx50.

This negative correlation is not surprising though, given the fundamental that weaker Euro is good for exports, thus good for stocks.

However, Euro is not a safe haven like the Yen as the chart revealed sharply changing correlation with changing fundamentals.

During Greek crisis, Euro and the stocks showed high positive correlation.

Euro is currently trading at 1.117 against Dollar.