Safe Haven Currency



What’s a safe haven currency?

First, we have to know what’s a safe haven asset.

What is a Safe Haven Asset?

When sh$t hits the fan (so to speak), investors become wary and increase their positions in assets which are deemed safe.

But wait, let’s put things in context.

Imagine you have worked for two decades and have had the fortitude and fortune to safe about one million American dollars (USD).

You’ve saved these for retirement, but you still have ten or more years before you choose to take the plug.

These might be the ticket for your golden years, but is the USD a safe haven currency?

What do you do with the money?

If you’re conservative, you’ll most likely put a good portion of it in low risk (read: safe) investments such as sovereign bonds from solid governments.

But you will also consider placing some of that cash in stocks, and maybe real estate through REIT’s or a direct rental investment if you find a good mortgage deal.

And that’s what you’ve been doing, till now…

Anytime

The markets have gone crazy, stocks are down, and so are bonds (WTF, you say).

Stocks are too risky, and some governments have had the audacity of reneging on their debt!

No one knows how long this sh$t show will last!

What do you do with the money?

Oh! But there are assets which are not correlated to stocks or bonds.

Actually, these assets increase or hold their value best, when traditional investments show too much volatility (too much risk).

Safe Haven Assets -they’re called

Speaking like Master Yoda much?

Thus, instead of seeing your hard-earned wealth evaporate, you shift a portion of it to gold and/or currencies to keep it safe in these hard times.

Some of the traditional safe haven assets are gold and (some) currencies.

We will soon jump into those currencies, as in, right after this sentence.

Right below this one.

Safe Haven Currency

So why currencies? Well you have gold, but you also have cash.

Wait, but doesn’t inflation f&ck you over?

Yes and no. In some countries, inflation is negative (see Japan below), in which case, holding cash IS a good thing.

And even when inflation is positive (the norm), losing that relatively small percentage (2-4% in many developed countries) is better than risking the farm in the stock market (in a period of serious volatility).

You also get the inherent liquidity of cash – should you need to move it or use it quickly.

Both gold and currencies can serve as Safe Haven Assets.
But which currency is best?

Ok, you convinced me.

Cash is good, but which type of cash?

USD, EUR, CAD, GBP?

Tell me now!

To elucidate this point, let’s jump back into a story:

This is your career now.

You’re a portfolio manager at a major pension fund.

You have to allocate a portfolio worth millions of USD, and you’ve hit a period of serious volatility and uncertainty in the global markets.

You’re considering buying and holding currencies, but which one do you favor?

Well, first you need to think about the likelihood of such currency keeping its value throughout the crisis. Maybe you want it to appreciate while we’re at it.

Hmmmmm.

Ok, so if some countries could renege on their debt, or their economies are shitty, their currencies won’t be attractive, right?

Thus, a country with too much external debt (measured by its net debtor/creditor position against the rest of the world) is out of consideration.

Also, a country with a weak economy won’t make the cut. We have to stick with strong, developed economies capable of withstanding a recession.

Next, we want a place with stability, both in terms of economics and politics. Since the latter often means the former.

So with these considerations in mind, which currencies are favored and have the status of safe haven currency with investors?

Japanese Yen (JPY)

Today, I would argue the Japanese Yen (JPY) is the top safe haven currency.

Why do investors favor the Yen?

Well, let’s start by looking at Japan’s Current Account balance:

yep, those are trillions…

-If you're interested in seeing some of that data by yourself you can go to trading economics.

Wait, I don’t get it.

You know a current account measures the net creditor or debtor position of a country versus the rest of the world.

Some countries borrow from others in order to finance government expenditure (a-hem, USA).

While others, such as Japan, lend to the rest of the world.

This means the rest of the world demands Japanese Yen (JPY) more than Japan demands other currencies (roughly speaking).

But more importantly, Japan isn’t deep in (foreign) debt.

On the contrary, you can rest assured that foreign debt won’t make the government crash and start printing money like crazy (I’m sorry Venezuela).

Coupled with a very stable political and economic (even if deflationary) environment, this makes Japan a very safe place indeed.

Thus, Japan’s currency, the Yen, is the topmost safe haven currency.

This is where safe haven flows go to.

Therefore, be careful whenever you sell JPY in a pair, since safe haven flows can occur suddenly, and you can get royally screwed.

What to do? Keep an eye out for circumstances with potential to make investors flow into safe haven currency. For example, geopolitical conflicts.

Swiss Franc (CHF)

I’ll keep it short and sweet.

In some respects, Switzerland is very similar to Japan.

Both are net lenders with stable economies and political environments.

The CHF is as good as gold: a solid deposit of value.

According to some experts though, the Yen has performed better in times of uncertainty, which takes us to the chicken or the egg problem.

Does JPY perform better because more money flows into it to begin with?

Or does more money flow to JPY because it performs better?

I’ll leave that to the PhD’s.

Closing Remarks

Is that it? What about the United States Dollar (USD)? Isn’t it the world’s reserve currency?

If Central Banks and other international institutions keep USD as their main reserve why didn’t you mention it as a safe haven currency?

USD could be considered a third option, but the thing is…

The United States has ballooned its foreign debt big, big time in the last 15-20 years (with emphasis on the most recent years).

As such, many experts argue it is not safe to keep a blind faith on the USD.

However, the more likely answer is the USD is more correlated to stock and bond (all types of treasuries) markets in the United States, which makes it an unsafe place to be when those two markets hit the fan (like sh$t).

And this is just my opinion on why the markets move out of the USD on times of uncertainty.

I love me some greenbacks though.

Hope this was entertaining.

 

Emil Christopher,

The Forex Economist

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