What Are “Safe-Haven Currencies” and How to Trade Them?

As a trader, you certainly want to make use of the volatility of the market. However, sometimes a trader needs to pause his trading and look out for stability to secure his funds. When trading the forex market, some currencies show higher volatility in times of uncertainty than others. However, there are some that tend to retain or increase in value during times of uncertainty and market instability. Those currencies are often seen as “safe-haven” currencies because they are more likely not to correlate with the performance of the stock market and bonds, which makes them favorable for trading in the event of market crashes.

In this article, we will take a look at the potential safe-havens of the forex market and how you can trade them during downturns.

WHAT MAKES A CURRENCY A SAFE-HAVEN CURRENCY?

There are several factors that are relevant when it comes to classifying a safe-haven currency. Important factors to consider are strong liquidity and the political & economic situation of the issuing country, such as a stable political system, economic growth, and stable finances.

Of course, these factors are not always fully reliable, but, as the saying goes, the exception proves the rule. As an instance, the Japanese Yen is often seen as a safe-haven currency although the country is in a rather poor financial situation, which includes the highest government debt to Gross Domestic Product in the world. In fact, Japan recorded a government debt equivalent to 253 percent of the country’s GDP in 2017.

All factors that impact the currencies’ worth are factors that a trader should consider when choosing a safe-haven currency. Currency can become too strong, as for example the Franc, which resulted in the Swiss National Bank increasing the inflation rate significantly to protect exports. If the government interferes with the currencies’ supply with inflationary actions, the currency decreases in value. 

The Japanese Yen is subject to a similar scenario; it tends to rise during times of global risk-off sentiment. But because the Japanese nation is so reliant on exports, the soaring of the Japanese Yen can be very problematic – as exports become less attractive for the other countries, the Japanese businesses are less profitable and as a consequence, equities could fall. To prevent such an event from happening,  the Japanese government may sell Yen for the leading currency, the US Dollar, or, as before in 2016, even adopt negative interest rates in an effort to maintain a low currency value.

Which Currencies Are The Top Safe-Havens?

The JPY, CHF, USD, and EUR are all considered as safe-haven currencies. However, because of the fact that the Japanese Yen tends to rise in times of worldwide uncertainty, it is much more likely to be a reversal of traders’ convey trades as opposed to intentional funding within the currency.

The CHF can be seen as a safe-haven currency of the forex market for a variety of reasons:

First and foremost, the liquidity of the Swiss Franc is very high as it is paired with the USD. 

Secondly, Switzerland has an exceptionally competitive business environment, alongside low company tax, a transparent economic system, and records of correct economic management.

Furthermore, Switzerland is impartial and will probably keep its status, so Switzerland is less likely a subject of turmoil within the EU. In addition, Switzerland has massive gold reserves, as the Swiss National Bank maintains a huge part of its reserves in gold, causing the CHF to correlate with the rate of gold.

Although the CHF was hit hard by the last financial crisis because of its exposure to the banking region, it made its way back to a reliable haven and has attracted foreign buyers as numerous contributors of the Eurozone war.

Why is the USD secure haven forex?

Although the US Dollar doesn’t quite meet the requirements to be considered as a safe-haven, as the US is not excluded from global activities as there are important buying and selling partners throughout North and Central America, Asia, and Europe, the USD still can be seen as a safe-haven. Yet, indeed, the US has not even fully recovered from the last economic disaster, with unemployment rates still as high as ten percent and economic growth which has slowed down for a continuous period. 

However, the US Dollar’s safe-haven status is achieved by the reliability of the US Treasury to pay its investors. The last financial crisis showed that investors sell risky assets and turn to US Treasuries and the US Dollar during times of market turbulence.

Nevertheless, the Yen or even the Euro has often been the preferred safe-haven currency over USD for many traders, as it is highly debatable whether the USD is being bought in significantly bigger amounts than the other safe-haven currencies during economic woes.