A storefront decorated is with a Chinese national flag and red lanterns to celebrate the National Day in Beijing on Oct. 4.

Photographer: Yan Cong/Bloomberg

When the world’s financial markets hit turbulence, could you really turn to China’s yuan as a store of value?

The idea of the yuan as a refuge has gained some traction in recent weeks as it capped its best quarter in 12 years relative to the dollar. That label would put it on par with currencies traditionally deemed as safe in a market downturn, like the Japanese yen or Swiss franc.

In addition to dollar weakness, the yuan is being underpinned by a wide interest-rate premium over the rest of the world, as well as signs that China’s economy is recovering from the shock of the pandemic. But unlike a haven, China’s tightly-managed currency is gaining just as money flows into risk assets such as U.S. stocks or high-yield credit. In other words, it is strengthening in a relatively benign market.

Buying the yuan as a shelter from market volatility isn’t new: in 2017, the Chinese currency proved to be a better bet than the yen when North Korea fired missiles into the Sea of Japan. But history also shows it’s a risky strategy — when the yuan showed haven-like resilience in early 2018, it slumped to a decade low that year after the Trump administration slapped its first tariffs on Chinese goods.

Considering the policy risk in China and its capital controls, viewing the yuan as a haven will be inappropriate, according to George Magnus, research associate at Oxford University’s China Centre.

“The yuan can be considered a ‘good trade,’ which is a cyclical phenomenon and has nothing to do with haven status — the conditions for that are largely unfulfilled,”

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – The safe-haven yen and dollar rose on Friday after President Donald Trump tested positive for COVID-19, rattling investors just a month before November’s U.S. presidential election.

By afternoon trading, markets had calmed down, with the dollar and yen still up but moved in narrow ranges.

Data showing U.S. nonfarm payrolls rising less than expected in September, but with a drop in the unemployment rate, had little impact on currencies, as markets focused on Trump’s health.

Trump, who had played down the threat of the coronavirus pandemic for months, said he and his wife Melania had tested positive for COVID-19 and were going into quarantine, upending the race for the White House.

The news sparked some selling on Wall Street, while U.S. Treasury prices were lower after an initial rally.

The yen made its sharpest gain in more than a month to reach a one-week high of 104.95 against the dollar, then steadied. The greenback was last down 0.2% at 105.365 yen

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Implied volatility gauges for the yen rose to a four-week high of 7.62 vols

over the next month, signaling more choppy trading ahead.
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Mike Schumacher, senior macro strategist at Wells Fargo Securities in New York, said Trump’s COVID diagnosis added a layer of uncertainty to an already volatile election season, but the sharp market reaction from earlier in the global session has faded a bit.

“You can take one view and say that…this could limit the amount of political news over the next month,” said Schumacher. “Trump can’t really campaign and if Biden chooses to do a bit less also, you might get pretty limited news. That could reduce volatility.”

News that a $25 billion U.S. airlines deal was “imminent”, according to House Speaker Nancy Pelosi, also somewhat eased