The chart by currency fund manager Axel Merk of Merk Investments shows the 1-year rolling correlation between the U.S. dollar index and 10-year Treasury notes over the past 18 years, revealing a steep plunge from the summer of 2012 until today.
That drop-off means that while U.S. Treasuries are currently viewed as a safe haven, attracting investment, the U.S. dollar is not simultaneously rising but is in fact falling against a basket of currencies.
In other words, there is a flight out of the greenback at the same time as the flight to the safety of Treasuries. It’s not that the two assets are moving out of correlation; rather, the relationship is one of high and rising negative correlation (of close to -0.60).
A variety of conflicting approaches could explain this divergence. For example, Merk entertains the possibility that investors would turn to the dollar in a “real” crisis versus today’s “subtle” crises.
But the veteran currency manager prefers a different explanation. He says the sharp selloff in the dollar began precisely when European Central Bank head Mario Draghi promised to do “whatever it takes” to save the eurozone.
The chart suggests to Merk that, as he puts it, “the euro has become a true competitor to the greenback.”
It remains to be seen whether the declining fortunes of the dollar are a temporary phenomenon or indicative of a loss of safe haven status. Merk clearly favors the latter view, writing “we have long argued that there may not be such a thing anymore as a safe asset and investors may want to take a diversified approach to something as mundane as cash.”
Indeed, just days ago Gluskin Sheff chief economist David Rosenberg, widely followed by financial advisors who read his popular daily economic report, Breakfast with Dave, observed that global investors have been flocking to the Canadian dollar, despite aggressive efforts by Ottawa to talk down the loonie.
Writing in Canada’s Financial Post, Rosenberg writes:
“Net foreign buying of Canadian equities has topped $27 billion over the past six months, which has only happened two other times on record.
“Global investors apparently see what I see: CAD weakness represents massive stimulus.”