What are the safe-haven currencies? Which one is the best safe-haven currency?

Safe-haven currencies, also known as store-of-value currencies, refer to currencies that are less affected by political, military, and market volatility, and are relatively stable and less likely to depreciate. Safe-haven currencies aim to minimize the risk of depreciation, but that does not mean they are immune to fluctuations in market prices. Any currency can experience price fluctuations.

What are the safe-haven currencies？

The Swiss franc is widely recognized as a traditional safe-haven currency. Sometimes, other currencies such as the US dollar also serve as safe-haven currencies. Below, we will introduce them one by one.

Haven Currency: Japanese Yen

The safe-haven property of the Japanese yen is mainly supported by Japan's large current account surplus and its position as the world's largest creditor nation. Additionally, the widespread popularity of yen carry trades has enhanced the yen's safe-haven characteristics: during stable market conditions, investors borrow heavily in yen (due to its historically low interest rates) to purchase assets in high-yielding countries/currencies, but when overall market turbulence arises, these speculators are forced to sell their high-yielding assets and repay their yen liabilities, thereby boosting the yen's exchange rate.

In recent years, examples of significant appreciation of the yen due to safe-haven demand include the panic triggered by the near-bankruptcy of Long-Term Capital Management in 1998, the significant yen appreciation before and after the 2008 financial crisis, and the sharp rise in the yen against the pound sterling caused by the Brexit referendum in 2015-2016.

As both the US dollar and yen are considered safe-haven currencies, sometimes the USD/JPY exchange rate may not experience significant fluctuations, but there can be significant movements in cross-currency pairs such as GBP/JPY, AUD/JPY, and NZD/JPY.

Haven Currency: US Dollar

The safe-haven status of the US dollar is supported by the credibility of US Treasury bonds. Since the financial crisis, it has been common practice for investors to flock to US Treasuries and the US dollar whenever there is market turmoil.

However, recent market trends suggest that sometimes the safe-haven attributes of the yen and the euro may be stronger than the US dollar. Some analysts have noted that in times of economic distress, there is little evidence to suggest that the market's purchases of the US dollar significantly outweigh those of other safe-haven currencies.

Haven Currency: Euro

Like the US dollar, there are differing views in the market about the safe-haven status of the euro. In recent years, the euro has indeed demonstrated some characteristics of a safe-haven currency. The low interest rates in major European economies have also created expectations for the euro to act as a safe-haven currency.

However, in early 2018, despite the sharp decline in the US stock market, market funds did not flow into the euro as much as expected. The Japanese yen, on the other hand, lived up to expectations and was sought after by the market at that time.

Haven Currency: Swiss franc

The safe-haven attribute of the Swiss franc is mainly attributed to the stability of the Swiss government and the strength of the country's financial system. Low interest rates and a high level of trust in the Swiss National Bank are also reasons why the Swiss franc has safe-haven properties.

A prime example of the Swiss franc's safe-haven status was in 2011 when concerns over the debt problems in the United States and the eurozone caused the Swiss franc to appreciate significantly against the US dollar and euro. The USD/CHF rate was around 0.9400 at the beginning of 2011 but had fallen sharply to 0.7900 by July of that year. At the same time, the EUR/CHF rate had plummeted from 1.3000 at the beginning of the year to parity.

Like the Japanese yen, carry traders also like to borrow low-interest or interest-free funds from the Swiss franc and then repay the loans during market turbulence.

Haven Currency: Chinese Yuan

The Chinese yuan officially joined the SDR in October 2016, and its share in foreign exchange reserves held by central banks around the world is expected to increase. There have been discussions about the yuan becoming a safe-haven currency, but a research report by the US Federal Reserve stated that although the yuan performed better than other major currencies between 2011 and the end of 2015, its relative value declined compared to traditional safe-haven currencies whenever market volatility increased after that period. The results of the report do not support the idea that the yuan can become a safe-haven currency, and it is believed that there is still a long way to go before the yuan is considered a safe asset.

What is the best safe haven currency？

The USD/JPY may even rebound during periods of risk aversion, contrary to market perception. Japanese investors actually buy foreign assets during times of uncertainty, rather than repatriating their capital. The Swiss franc remains a safe haven currency, but its appreciation potential is limited by Swiss National Bank intervention.

Among the G10 currencies, buying USD/AUD is the strongest safe haven play. During risk aversion, the yen should strengthen against the AUD, NZD, NOK or GBP, but it should remain stable or even weaken against the USD, as the dollar becomes a better safe haven tool.

What are the characteristics of safe-haven currencies？

The characteristics of a safe-haven currency are:

• Appreciation during periods of weakness in risk assets.

• Typically has lower yields as it is used as a funding currency for carry trades and international corporate borrowing.

• Considered a safe haven and thus bought by speculators as a hedge or during times of stress.

• The country often holds a significant amount of net international investments, which may be repatriated during times of stress.

A current account surplus is not necessary - the US, for example, is a deficit country, yet the US dollar, as a funding currency, is a safe haven.

Relatively speaking, the Japanese yen is the “safest” safe-haven currency, while the Swiss franc and the US dollar compete for second place.