Risk Decouples In Parts Of Asia

With mounting concerns last week over the exponential spread of the coronavirus around the world, global financial markets tumbled, particularly those considered exposed to risk (read stock markets). And naturally, that led investors to flee riskier assets for those that are considered more of a safe haven.

Gold went up. Stocks went down. Gold went up, and some of the riskier currencies went down.

Except in Asia.

One measure of risk in Asia, the cross currency AUDJPY, and gold, almost always have a strong negative correlation. But not last week. That relationship for a time turned strongly positive with both gold and AUDJPY moving higher (although by the end of Friday (March 6), AUDJPY was essentially flat for the week). Same for gold and the SSE Composite Index, and, gold and the Hang Seng Index (meaning they all were moving higher).

Risk in Asia essentially decoupled, at for the week, with risk elsewhere around the world. The reason was that Asian financial markets had gotten slammed weeks ago when the coronavirus was running rampant there. And investors built their new economic models into asset pricing. So, as those markets began to gradually gain back some of those earlier losses, you also began to witness the spread of coronavirus in Europe and the U.S. and then their respective financial markets spin in extreme volatile mode. And that meant, unrelated to anything in Asia, gold broke higher as a flight to quality move.

What this means for correlation traders - history has shown, for example, that gold and AUDJPY almost ALWAYS trade in opposite directions. So, when you have such a strong positive correlation now between the two, that tells you there is a trading opportunity today. And perhaps with gold and the SSE Composite (or gold with the Hang Seng as well).