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A Guide to Safe-Haven Currencies and How To Trade Them

A Guide to Safe-Haven Currencies and How To Trade Them

2018-12-13 13:03:00
Ben Lobel, Markets Writer
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Safe haven currencies include the Japanese Yen (above)

Safe-haven currencies are currencies that tend to retain or increase in value during times of uncertainty and market instability. Safe havens tend not to have a correlation with the performance of stocks and bonds, making them ideal for trading in the event of market crashes.

In this piece, we’ll look at some of the safe-haven forex pairs traders may opt for, exploring why they offer protection and revealing how to trade them to protect against downturns.

What Qualifies as a Safe-Haven Currency?

When considering the question of what qualifies as a safe-haven currency, the factors to bear in mind can relate to the currency itself. These include strong liquidity, as well as to the wider economic climate in its issuing country - such as a stable political system, economic growth and stable finances.

However, these factors are not always fully reliable as indicators of a safe-haven currency. For example, the Japanese Yen is seen as a safe haven despite the country’s weak financial situation, which includes the highest government debt to GDP in the world.

Factors that actively undermine a currency’s safe-haven appeal should be considered by traders. One of these is that governments can intervene to stop a nation’s currency becoming too strong. An example of this is the Swiss Central Bank, which has on numerous occasions flooded the country’s market with Francs to protect exports.

The Japanese Yen experiences a similar pattern; it tends to soar during periods of global risk-off sentiment. As the country is so reliant on exports, the rising Yen can be problematic – when exports become less competitive, Japanese businesses are less profitable and equities can fall. As a result, Japan’s government may sell Yen and buy US Dollars, or, as in 2016, even adopt negative interest rates in an effort to maintain a depressed currency.

Top 4 Safe-Haven Currencies to Trade

The list of safe-haven currencies includes the Japanese Yen, the Swiss Franc, the Euro, and the US Dollar.

US Dollar (USD)

Euro (EUR)

Japanese Yen (JPY)

Swiss Franc (CHF)

Rank (trading volume)

1st

2nd

3rd

6th

Percentage of global trades involving the currency*

88

31

22

6.9

Most commonly traded pair

EUR/USD

EUR/USD

USD/JPY

USD/CHF

Average amount traded*

$4.4 bn

$1.6 bn

$1.1 bn

$0.24 bn

Source: Bank for International Settlements (2016)

*Net-net basis, daily averages for April 2016

Japanese Yen (JPY)

The Yen as a safe haven is driven by factors such as Japan’s strong current account surplus, positioning the country as the world’s largest creditor nation. Additionally, the Yen is a popular carry trade, meaning investors often borrow Yen from Japan, where interest rates are low, in order to buy currency in a country where interest rates are higher. This can push up the price of Yen during financial turmoil, as international speculators choose to unwind risky positions and pay back Yen loans.

In recent years, examples of the Yen’s appreciation include during the 2008 financial crisis, with the currency soaring against the British Pound and the US Dollar, the uncertainty of Brexit in 2015, and the 1998 near-collapse of the Long Term Capital Management Hedge Fund.

Since both USD and JPY are considered safe haven currencies, sometimes the USD/JPY market doesn't move strongly, but a cross pair like GBP/JPY, AUD/JPY, and NZD/JPY often does.

US Dollar (USD)

The US Dollar’s safe-haven status is maintained by the reliability of the US Treasury to pay its investors. Since the financial crisis, the received wisdom has been that, during times of market turbulence, investors sell risky assets and turn to US Treasuries and the US Dollar.

However, in recent years there have been instances when Yen and Euros have been the safe haven of choice over USD, and some analysts argue that there is little evidence that USD is being bought in meaningfully larger amounts than other safe haven currencies during economic difficulties.

Euro (EUR)

As with the US Dollar, disputes exist over the Euro’s safe-haven status in today’s climate. The Euro has certainly displayed the hallmarks of a safe haven in past years - in 2015 analysts turned increasingly bullish on the Euro, driven by a positive outlook for selected European economies. Also, the low interest rates in major European economies led to expectations of the Euro acting like a safe haven.

However, in early 2018, following a plunge in US equities, the expected rush to buy Euros didn’t happen. It was business as usual for the Japanese Yen though, which did attract buyers.

Swiss Franc (CHF)

The safe-haven status of the Swiss Franc is underpinned by a stable Swiss government and a strong financial system. This is coupled with low inflation and high levels of confidence in the country’s central bank, the Swiss National Bank.

One example of CHF demonstrating its allure was 2011, when US Dollars and Euros poured into the Franc as nervous investors flocked for protection against the debt crises on either side of the Atlantic. This caused USD to slump against CHF from 0.9400 at the beginning of 2011 to 0.7900 by July, meaning one US Dollar could buy only 0.79 Swiss Francs. On the Euro side, in July 2011 EUR fell against CHF to around parity, from around 1.3000 at the start of the year.

As with the Japanese Yen, carry trade speculators like to leverage funds in Swiss Francs with no funding costs, paying back the loans when the position goes against them.

Using Safe-Haven Currencies in Forex Trading

When using self-haven currencies in forex trading, traders should be aware that some currencies, as discussed above, react differently to market events than others. Also, there is not always consensus on what currencies qualify as safe havens.

For example, while some view the Norwegian Krone as a safe haven, citing the country’s lack of net debt and its current account surplus, others believe that it is not the best option as it lacks liquidity and is too correlated to commodity currencies.

As well as using currencies for safe havens, gold is a popular consideration for traders looking to protect against excess risk. Gold is seen as a safe-haven because of its proven store of value, market utility and a price that generally isn’t influenced by interest rate decisions from central banks.

Whether going long on safe-haven currencies or choosing a higher risk strategy, make sure you access DFX Forex trading and educational guides to boost your confidence and skills, and refer to our news and analysis to stay up to date on currency pair movements.

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