A safe haven currency is a currency which is deemed a safer place to invest in and hold funds, relative to other riskier investments. In times of economic uncertainty, it’s typical to see safe haven currencies rise in value, as investors move towards these to reduce the risk of losing money through maintaining their other riskier investments.

 

Some examples are the Swiss franc, US dollar and Japanese yen, but can also include the euro. Other safe haven investments might include Gold, and US & German government bonds, or debt. The pound was considered a safe haven many years ago but as the UK has come to import more from overseas, and seen increased political and economic upheaval, is not considered to be at present.

As we will see, there are some common features that make a safe haven currency, but displaying these elements doesnt necessarily guarantee you fit the bill. Market sentiments are constantly changing, with even the safest of havens from time to time not displaying such behaviours, according to global sentiment at the time.

Financial markets are ultimately a reflection of investors attitudes to the attractiveness of an asset or investment, and these behaviours often follow certain rules, but it isnt always guaranteed.

We can look at the economic make up of each of these individual countries or assets, and their economic history to better understand why they are chosen, and perform in this manner. I think to help understand what a safe haven currency is, it is perhaps helpful to understand what is not a safe haven, ie a riskier currency.

 

What’s a Risky Currency?

A key goal of global finance in the modern world is to generate a return for investors. Investors include private individuals but also banks, hedge funds, pension funds and other large institutions. It is the job of these actors in the global economy to invest in certain types of assets with the goal of seeing a rise in value. This investment and return practice helps to ease the wheels of the global economy, providing capital and investment for economic expansion and growth.

It might be considered ‘riskier to invest into a country or currency where there is a high degree of political and economic uncertainty, and perhaps less transparency around ease of access to investment, or difficult to navigate regulations. In some cases, such investments might generate very high returns because of higher interest rates and higher growth rates.

An example would be South Africa where current interest rates are 4.25%. This is a much higher return than the United Kingdom for example which offers 0.1% and the United States at 0.1 – 0.25%. On the face of it, this makes the South African rand more attractive to invest in, since in that country and currency you will get more interest and a better return.

However, because of political and economic uncertainty, the rand has lost value in recent weeks. On the 23rd March the interbank GBPZAR exchange rate was 20.32, on the 22nd April, just one month later, it is 23.28, a decline of 14%. Such volatility means that despite investors getting a better return, the volatility in the currency makes it a riskier investment.

Other riskier currencies include the Australian dollar, and the New Zealand dollar, although they might be perceived as less risky and volatile than the rand. Many of them can be grouped in a basket of ‘commodity currencies, along with the Canadian dollar. Such currencies might weaken in times of economic uncertainty over the global economic outlook, as their economies rely on healthy global trade to perform well. This is typically an opposite response to a safe haven,  which would typically rise in value on such news.

It would be quite disappointing for a pension fund for the nursing profession to learn that all their years of investment and retirement funds had been lost because it was decided a good idea to invest in a currency due to the attractive interest rate, only for the volatility to mean that actually 10% had been wiped off its value.

The rand is therefore a riskier currency and in a typical investor portfolio, there will be a wide range of riskier and safer investments and not just in terms of currency. This is the role of the global finance community, who will manage investment for different clients, ranging from private individuals up to the interests of governments and multi-billion dollar global asset managers.

 

The Original Safe Haven

Let us compare this situation then to Switzerland and the Swiss franc whose symbol is CHF. Termed the ‘Swissie by traders, this is the original safe haven currency. A very high level of confidence in the Swiss banking system, and Switzerlands historically neutral political position in global affairs, has seen the currency used by investors as a shield against the kind of risk explained above.

Interestingly, the current interest rate in Switzerland is -0.75%, meaning investors pay to keep money there. However, this has done little to remove the attractiveness of the franc, despite its status as a safe haven being questioned in recent years.

The country sells more in exports to other nations than it spends, which means it has a trade surplus. Being seen as a world leader in its engineering expertise, their exports of industrial machinery and watches hold gravitas on the global market. Throughout history and any major events which have caused economic disruption, with examples including 9/11, the 2008 economic crisis, and the recent Coronavirus pandemic, the franc has risen in value.

Just lately we have seen increased volatility on the franc as the fresh oil crisis has reignited fears over the economic outlook for the global economy, and as expected the franc has strengthened.

 

Other Features of Safe Havens

A key factor of a safe haven currency is therefore a strong economy, often with a strong trade surplus. Germany, Japan and Switzerland all have a strong trade surplus, and the Eurozone as a whole also runs a trade surplus. This basically means they sell more to other countries than they import, which keeps a strong flow of money coming into that country and currency, and ensures continuous demand for their economic activity.

The US however runs a trade deficit, ie they spend more overseas than they bring in. Their deficits are with their major trading partners China, Mexico, Japan and Germany. A key bone of contention with Donald Trump in the recent trade wars has been reducing these deficits.

Nevertheless, the United States is considered a safe haven because of its overall economic and political dominance, with the US being the worlds largest economy. Plus, the US dollar is seen as the worlds reserve currency, meaning its predominantly used by many countries in international trade and finance to simplify matters between different currencies.

A strong reliance on the US dollar in global trade and its prevalence throughout the farthest reaches, ensures it continues to be a top safe haven currency, and has been regularly displaying such behaviour throughout the COVID-19 pandemic, rising and falling along with the the outlook on the global economy.

 

What Can We Expect From Safe Havens in The Future?

The future might well continue to see challenges to the might of the US dollar and the franc; there has been a rise in the importance of the Chinese yuan in recent years, with the Chinese economy having become a much bigger player in the global market.

Chinese Gross Domestic Product (GDP) represented 15% of global GDP in 2017, in 2010 it was 9.3%, a sign of how fast its been growing and increasing its share. In the future, continued growth and easier access to the currency might change the picture and see it become more of a haven in the way the US dollar has. The global fight against Coronavirus is changing attitudes on the global economy, and what emerges out the other side might be different to now.

Currently, the historical safe havens of the US dollar, the franc and the yen have appreciated during the Coronavirus turmoil. This is not overly surprising and is a natural response to investors seeking some certainty away from potential risks elsewhere.

The most recent event we have to compare with the present day is the financial crisis of 2008/9, where the greenback maintained a strong performance. But as global confidence rose in the following years, investors had courage to look elsewhere for returns and the US dollar gently lost value.

So far, we are seeing the US dollar continue to react to negative economic events by rising in value, with signs of progress in combating the crisis leading to a weaker US dollar, all typical behaviour and reactions displaying its safe haven status.

It seems for now many of the typical behaviours of safe haven currencies will continue, and such behaviours should be noted when considering any potential movements ahead, not just for the safe haven currencies listed but also for the riskier currencies too, in the current uncertain global economic environment.

For insight into the political and economic factors impacting global exchange rates in April, read our latest Monthly Currency Forecast below.

 

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