TOKYO • As China's economic slowdown and a possible US Federal Reserve interest rate increase roil global markets, currency traders are treating the yen and the euro as havens of choice.
The correlation between the yen and the euro reached its highest since early 2007 as the two currencies moved in tandem - rising and falling - amid last week's global stock rout. The Japanese and European currencies both advanced yesterday for the first time in a week as uncertainty increased about global monetary policy direction.
The US Federal Reserve must decide when it will raise rates for the first time since 2006, while China watchers ponder if the Asian nation can engineer a soft economic landing with a report today forecast to show manufacturing there contracted last month.
"There is strong wariness among market players over a slew of key economic data this week and over China," said Mr Kengo Suzuki, chief currency strategist at Mizuho Securities.
"With sharp one-sided, risk-aversion correcting in the latter part of last week, markets are preparing for this week's data and meetings. Stability should return as China worries recede and expectations heighten for the US economy."
The yen gained 0.5 per cent to 121.12 per dollar as of 2.45pm in Tokyo. It has strengthened 2.3 per cent last month, heading for its biggest advance since January 2014, after China unexpectedly devalued the yuan on Aug 11.
The euro rose 0.6 per cent to US$1.1249. The single currency has climbed 2.4 per cent last month, set for the best month since April.
"Yen demand is coming from traders wanting to buy some protection from volatility here," said Mr Robert Rennie, global head of currency and commodity strategy at Westpac Banking in Sydney. "It's a massive week across all markets."
The Bloomberg Dollar Spot Index fell 0.2 per cent to 1,205.43, after completing its first weekly advance since China's devaluation.
Manufacturing data and employment figures are due from the US this week. Economists forecast that a report on Friday will show employers hired 220,000 workers last month, compared with an average of 211,000 so far this year. Fed vice-chairman Stanley Fischer on last Saturday indicated policymakers are open to increasing borrowing costs this month.
Hedge funds and other large speculators reduced their bearish yen wagers in the week to last Tuesday to the lowest in more than three months.
"What we're looking out for this week is the dollar strengthening back again given that Fischer has failed to rule out a September rate hike," said Mr Raiko Shareef, a markets strategist in Wellington at Bank of New Zealand. BLOOMBERG