What the New Breed of Safe Haven Currencies Means

November 15th, 2014
in contributors

by Saxo Capital Markets

Alternative 'safe haven' currencies seem to have retreated, with markets returning to traditional 'safe haven' FX for the first time since the 2008 financial crisis Share on facebook Share on linkedin Share on twitter Share on google_plusone_share 0 ​Since the beginning of the 2008 financial crisis that drew large Western economies into turmoil, investors sought more niche currencies such as the Canadian and Australian dollars. However, recent price action would suggest some return to normality in financial markets.

Follow up:

Investors bought the US dollar in droves during the last quarter - its surge of 7% represented its biggest quarterly rise since the same period in 2008. The gain lifted volatility and hit other dollar-denominated assets such as commodities, sending emerging market currencies tumbling.

The trigger has been geopolitical and economic events: the referendum in Scotland, the continuing economic struggles in China and the Eurozone, the expectations of an imminent interest rate rise in the US, and heightened conflict between Russia and Ukraine and within the Middle East.

The spike in currency volatility marked a reversal of trends in recent years, with investors returning to traditional 'safe haven' currencies.

What determines a safe haven?

  • Market size and volume
  • Stable interest rates
  • Controlled inflation
  • Robust balance sheets
  • Strong foreign investment positions
  • Liquid and robust financial markets
  • Low risk of geo-political or financial instability

Many investors fled to gold assets in the aftermath of the financial crisis with the precious metal peaking at $1,920 in the summer of 2011, however, the yellow metal has struggled to maintain its gains, falling below $1,180 for the first time in four years during October. Photo: Shutterstock

Historically, the 'safest' haven in periods of turmoil has been gold (although the commodity has experienced price peaks and troughs). Typically, there are defensive sectors within each asset class. For example, traditional defensive sectors are pharmaceuticals within equities; Treasuries within bonds; US dollar, Swiss franc and yen within forex.

What this means for traders:

The Australian government is actively trying to cool the rise in AUD, while the euro appears set for a period of rebalance as the region battles economic decline and worries over the impact of geopolitical troubles, particularly in Ukraine and the Middle East.

EUR recently hit a 21-month low against the CHF and was struggling against JPY too, which some consider the most secure safe haven within G10. The threat of war and deflation at a time when other developed economies are deep into recovery does not bode well for the currency.

The key in the short-term will be interest rate decisions in the UK and, more importantly, the US. The markets are expecting the US economy to be strong enough to bear an interest rate hike in the first-half 2015.

If a rise occurs within that timeframe then emerging market debt and currency, which are already being hit by a flight from risk and search better quality yield, should continue to face headwinds.

As ever, traders will be watching central bank action in Europe, UK and US. It could be a choppy ride, but one where the odds seem to have returned in favour of traditional 'safe havens'.

Disclaimer: Our products are traded on margin and it is possible to incur losses that exceed your initial deposit. This material should be considered as a marketing communication under the Financial Conduct Authority's rules. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, nor is it subject to any prohibition on dealing ahead of the dissemination of investment research. Saxo Capital Markets UK Limited ("SCML") undertakes reasonable efforts to ensure that any information published in this communication is reliable. SCML makes no representation or warranty, or assumes no liability, for the accuracy or completeness of any information contained in in this communication. SCML provides an execution only service and this communication does not take into account any particular recipient's investment objectives, special investment goals, financial situation, and special needs and demands and nothing herein is intended as a recommendation for any recipient to invest or divest in a particular manner and SCML assumes no liability for any recipient sustaining a loss from trading in accordance with a perceived recommendation. Saxo Capital Markets UK Limited is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871​

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