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- WHAT KIND OF CURRENCY IS CONSIDERED TO BE A SAFE HAVEN?
- TOP 4 SAFE-HAVEN CURRENCIES TO TRADE
During economic uncertainty and market volatility, some currencies tend to either maintain or grow their value, These currencies are known as safe-haven currencies, Because safe havens often do not have a link with the performance of stocks and bonds, trading them in the case of a market crisis is one of the most advantageous things you can do.
This article looks at some safe-haven forex pairs traders could invest in. We’ll investigate why these pairs provide protection and disclose how traders can trade them to hedge against market volatility.
WHAT KIND OF CURRENCY IS CONSIDERED TO BE A SAFE HAVEN?
When contemplating the issue of what constitutes a safe-haven currency, one must consider a variety of criteria, some of which may relate to the currency on its own, These include a high level of liquidity and other aspects of the larger economic environment of the nation that issues the currency, such as political stability, economic expansion, and sound financial management.
On the other hand, the reliability of these criteria as indications of a currency’s status as a haven can only sometimes be guaranteed. A good illustration of this is the Japanese yen’s safe-haven status, despite Japan having one of the world’s worst financial situations, with the most significant ratio of government debt to GDP.
Traders should consider factors that actively work to diminish the desirability of a currency as a safe-haven investment, One of them is that governments can intervene to prevent an overvalued currency for their country, One institution that has done this is the Swiss National Bank, which has done it many times to safeguard the country’s exports by flooding the market with Swiss francs.
A similar trend can be seen with the Japanese Yen, which tends to appreciate when sentiment worldwide is negative toward risk When exports become less competitive, Japanese firms are less lucrative, and equity prices might decline. Because Japan is so dependent on exports, the growing value of the yen can be troublesome for the nation. As a consequence, Japan’s government may choose to sell yen and purchase dollars instead, or it may even choose to implement negative interest rates, as it did in 2016, to keep the yen artificially low.
TOP 4 SAFE-HAVEN CURRENCIES TO TRADE
The Japanese Yen, the Swiss Franc, the Euro, and the United States Dollar are some of the currencies that make up the list of safe-haven currencies.
Bank for International Settlements (2016) is cited as the source.
*Net-net basis, daily averages for April 2016
Japanese Yen (JPY)
The strength of Japan’s current account surplus, which places the nation as the biggest creditor nation in the world, is one element that contributes to the Yen’s status as a haven currency. In addition, the yen is often used in carry trades, meaning that investors frequently borrow yen from Japan, which has relatively low-interest rates, to purchase currency in a nation with much higher interest rates. During times of economic upheaval, this might increase the price of the yen because overseas speculators may opt to liquidate risky holdings and repay yen debts.
In recent years, some instances of the Yen’s appreciation include the following: during the 2008 financial crisis, when the currency skyrocketed against the British Pound and the US Dollar, the uncertainty that surrounded the Brexit vote in 2015, and the almost catastrophic failure of the Long Term Capital Management Hedge Fund in 1998.
Sometimes the USD/JPY market doesn’t move dramatically, but a cross pair like the GBP/JPY, AUD/JPY, or NZD/JPY market typically does, This is because both the USD and JPY are regarded as haven currencies.
US Dollar (USD)
The trustworthiness of the United States Treasury Department in terms of making payments to the country’s investors helps to keep the U.S. dollar’s reputation as a safe-haven currency intact. Since the global financial crisis, conventional wisdom has held that when times are volatile on the market, investors should sell risky assets and put their money into US Treasury bonds and the US dollar. This has been the case even when the opposite is true.
However, in recent years, there have been situations in which the Yen and Euros have been the haven of choice rather than the USD, and some experts claim that there is no evidence to support the notion that the USD is being purchased in considerably more significant quantities than other haven currencies during times of economic uncertainty.
Euro (EUR)
As with the United States Dollar, there is debate on the validity of the Euro as a safe-haven currency in the current environment. In recent years, the Euro has unquestionably shown the characteristics of a haven currency. In 2015, experts were more optimistic about the Euro, spurred by a good forecast for a selection of European nations. In addition, the low interest rates prevalent in the leading countries of Europe have contributed to the anticipation that the Euro would operate as a haven.
Despite this, the anticipated stampede to purchase euros did not occur early in 2018 after a steep drop in US equity markets. However, the Japanese yen usually continued to trade, bringing in a steady stream of purchasers.
The CHF currency symbol
The reliability of the Swiss government and the robustness of the country’s financial system are the primary reasons for France’s reputation as a safe-haven currency. This is in addition to Switzerland having a low inflation rate and a high degree of trust in its central bank, the Swiss National Bank.
2011 is a good illustration of the attraction of the CHF since it was the year concerned investors rushed to the Franc to shelter themselves from the financial problems occurring on both sides of the Atlantic. Investors poured dollars and euros into the Franc. Because of this, the value of the USD decreased relative to the CHF from 0.9400 at the beginning of 2011 to 0.7900 at the end of the year. This meant that one US dollar could only purchase 0.79 Swiss francs. The value of the Euro decreased against the Swiss Franc in July 2011, reaching almost parity after beginning the year at approximately 1.3000.
Carry trade speculators want to leverage money in Swiss Francs with no financing costs, paying back the loans when the position goes against them. This is similar to how carry trade speculators like to leverage funds in the Japanese yen.
When Investing in Forex, It Is Important to Use Safe-Haven Currencies
The use of safe-haven currencies in foreign exchange trading requires traders to be aware that, as was said before, various currencies have varied responses to the same market occurrences, There is sometimes widespread agreement on which currencies should be considered safe havens.
For instance, some people feel that the Norwegian Krone is a haven since Norway has no net debt and a current account surplus, Other people believe that the Norwegian Krone is not the most excellent choice because it needs more liquidity and has an excessive correlation to commodity currencies.
Gold is a well-liked option for investors who want to hedge their bets against excessive risk, Investors may use gold like they use currencies as safe havens, Gold is considered a haven because it is an effective store of value, it has market utility, and its price is mainly unaffected by interest rate choices made by central banks.
You should ensure that you have access to DFX Forex trading and instructional manuals to increase your confidence and abilities, and you should refer to our news and analysis to remain up-to-date on the movements of currency pairs. Whether you decide to go long on safe-haven currencies or choose a strategy with greater risk, you should have this access.
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