Safe haven assets are closely tied to the need for security in uncertain times. Traditionally, investors would dump the riskier commodities and pick up more ‘stable’ and intrinsically valuable commodities, such as gold. For a long time this has generally meant that when the US dollar falls, the value of gold rises, giving the two an inverse relationship. When President Trump won the US election we initially saw a spike in gold values due to the uncertainty of the situation. As investors’ confidence began to rise again we saw the US dollar rise, and at the same time gold prices began to fall.
The same principle works when trading on currency pairs. In a similar way, in times of uncertainty investors will turn to ‘safe haven’ currencies that do not trend in the same way that the general market does.
Look to gold for inspiration
Even though the gold standard has been separated since 1971, there is still a psychological swing to gold when the US dollar falls and this can generally be used as an indication of movement. As a general rule of thumb, safe haven currencies can be those that move with a direct correlation to gold prices. In current times of economic unrest, investors currently look to the Japanese yen (JPY) and the Swiss Franc (CHF).
Why these currencies? Although Japan’s economy is heavily indebted it also has a significant amount of external investment, with investors holding their value in other countries’ currencies and commodities. When things are uncertain that value is drawn back into Japan as investors pull their external investments and invest locally, which drives up the value of the yen.
Switzerland has long had a very stable financial and political landscape as well as healthy economic indicators such as a high standard of living and low employment. It is not a member of the EU, and therefore is not tied to trends in the same way that many European countries can be. It’s also a tax haven for those looking to securely squirrel away money, meaning that the economy has a stable influx of wealth and positive trade balance figures. These various factors give the Swiss franc relatively predictable movements in times of market stress.
What can cause a drive towards safe haven currencies?
At the moment, there are few political and economic situations to watch. President Trump’s actions can stir up the market, as can unrest and uncertainty in North Korea and Syria. The currencies that are considered ‘safe’ have absolutely no guarantee on whether they’ll assist in risk management, but their historical behaviour provides some possibilities for traders wishing to hedge their options and predict momentum. If you’d like to dive deeper into the details of safe haven currencies along with other Forex
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