Resilient currencies are monetary units that typically preserve or appreciate in worth amid periods of uncertainty and turbulence in financial markets. These safe-haven currencies are characterized by their lack of correlation with the performance of stocks and bonds, making them an attractive choice for trading during market crashes.
In this article, we will examine a selection of secure forex pairs that traders might consider, delving into the reasons behind their protective nature and uncovering effective strategies for trading them to shield against downturns.
WHAT CONSTITUTES A SECURE-HAVEN CURRENCY?
When pondering the qualifications of a secure-haven currency, it's essential to consider both currency-specific aspects and the broader economic climate of the issuing country. These factors encompass robust liquidity and the stability of the political system, economic growth, and fiscal health.
Nevertheless, relying solely on these factors may not always guarantee a currency's safe-haven status. A prime example is the Japanese Yen, often perceived as a secure-haven despite Japan's concerning financial situation, characterized by the world's highest government debt to GDP ratio.
Traders should also take into account elements that can undermine a currency's appeal as a safe-haven. For instance, governments might intervene to prevent their currency from becoming too strong. The Swiss Central Bank has done so by flooding the market with Francs to protect exports.
Similarly, the Japanese Yen experiences a similar trend, surging during periods of global risk-off sentiment. This poses a challenge since Japan heavily relies on exports, and a stronger Yen can lead to less competitive exports, reduced business profitability, and declining equities. To counter this, Japan's government might sell Yen and purchase US Dollars or even employ negative interest rates, as seen in 2016, to keep the currency's value lower.
TOP 4 SECUIRE CURRENCIES FOR TRADING ARE Japanese Yen, Swiss Franc, Euro, and US Dollar.
|
US DOLLAR (USD) |
EURO (EUR) |
JAPANESE YEN (JPY) |
SWISS FRANC (CHF) |
| Rank (trading volume) |
1st |
2nd |
3rd |
6th |
| Percentage of global trades involving the currency* |
88 |
31 |
22 |
6.9 |
| Most commonly traded pair |
EUR/USD |
EUR/USD |
USD/JPY |
USD/CHF |
| Average amount traded* |
$4.4 bn |
$1.6 bn |
$1.1 bn |
$0.24 bn |
Source, Bank, for, International, Settlements, (2016),
*Net-net, basis, daily, averages, April, 2016.
(Note: I have considered "April" and "2016" as separate words.)
Japanese Yen (JPY)
Japanese Yen (JPY) is a sought-after safe haven, driven by factors like Japan's robust current account surplus, making it the world's largest creditor nation. It also serves as a favored carry trade, where investors borrow Yen at low-interest rates in Japan to invest in higher-interest rate countries, leading to Yen appreciation during financial turmoil as speculators unwind risky positions and repay Yen loans.
Noteworthy instances of the Yen's appreciation include its surge against the British Pound and US Dollar during the 2008 financial crisis, amid uncertainty surrounding Brexit in 2015, and during the near-collapse of the Long Term Capital Management Hedge Fund in 1998.
Though both USD and JPY are considered safe haven currencies, the USD/JPY market might not experience significant movements, whereas cross pairs like GBP/JPY, AUD/JPY, and NZD/JPY often display more pronounced fluctuations.
US Dollar (USD)
Amid market turbulence, the US Dollar has traditionally held a safe-haven status due to the reliability of the US Treasury in paying investors. However, in recent years, there have been instances where the Yen and Euros have been preferred safe havens over the USD, leading some analysts to question its supremacy during economic difficulties.
Euro (EUR)
The Euro has shown signs of being a safe haven in the past, with a positive outlook for select European economies driving bullish sentiments in 2015. Nevertheless, in early 2018, despite a plunge in US equities, the expected rush to buy Euros did not materialize, while the Japanese Yen remained attractive to investors.
Swiss Franc (CHF)
The Swiss Franc's safe-haven status is bolstered by its stable government, robust financial system, low inflation, and confidence in the Swiss National Bank. In 2011, the Franc attracted investors seeking protection against debt crises, causing the USD to decline significantly against the CHF.
Using a Safe-Haven Currencies in Forex Trading
Forex traders considering safe-haven currencies must understand that different currencies react differently to market events, and there is no unanimous agreement on which currencies qualify as safe havens. For instance, the Norwegian Krone is regarded as a safe haven by some due to its lack of net debt and current account surplus, but others believe it lacks liquidity and is too correlated to commodity currencies.
Apart from currencies, gold is a popular choice for traders seeking protection against excessive risk. Its reputation as a safe-haven asset is due to its historical store of value, market utility, and relative independence from central bank interest rate decisions.