(Bloomberg) -- Gold and emerging-market currencies just established a new risk-off milestone.
The benchmark index for developing-nation currencies is set for its biggest weekly drop since March relative to spot gold, underscoring the gloomy economic outlook and escalating tensions between the U.S. and China. That's taken their ratio to a record low, according to data going back to 1997.
Gold's advance in a world of ever-looser monetary conditions is luring flows away from the assets of emerging-market nations as they struggle with mounting fiscal woes and a patchy economic outlook. At the same time, the weak dollar has failed to bolster developing-nation currencies.
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Disruptions to global trade, remittances or tourism create a shortage of dollars in emerging markets, weakening their currencies. When local central banks reduce interest rates to catch up with the Fed, the resulting drop in yield pickup can also undo the benefits of a cheaper dollar.
Norman Villamin, the chief investment officer of private banking at Union Bancaire Privee, says “there's alpha to be had” by traders picking specific currencies in emerging markets, but warns that the outlook is challenging.
He's adopted a “barbell” strategy: investing simultaneously in risky assets and themes like green stimulus in Europe, on the one hand, and the “primary beneficiary of the fiscal and monetary easing” -- gold -- on the other.
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