Safe-haven currencies generally refer to currencies that are not easily affected by factors such as politics, wars, and market fluctuations, and are not easily depreciated. The factors that make a currency a safe-haven currency include the long-term stable purchasing power of the currency, the current political and fiscal status and prospects of the country where the currency belongs, and the relevant policies of the local central bank. Of course, the causes of different safe-haven currencies are also different. This article will introduce you to several “safe-haven currencies” recognized in the global market at this stage.

Why is the yen a safe-haven currency?

The risk aversion of the yen mainly comes from Japan’s geographic attributes, economic strength, currency attributes and monetary policy
Safe-haven currency yen

  1. As an island country, Japan is not easily affected by factors such as politics, wars, market fluctuations, etc., and can avoid the risk of devaluation to the greatest extent (not to say that it will never depreciate).
  2. As a developed country, Japan has a reasonable economic structure, a mature economy, and a complete financial system. In short, Japan’s strong economic strength provides the basis for the stability of the yen’s currency, and more importantly, Japan has second only to China’s Foreign exchange reserves.
  3. The Japanese Yen is a free currency
  4. The yen is a low-interest currency, which is the most direct reason why the yen has become a safe-haven currency. When the economy fails, it is necessary to cut interest rates to stimulate the economy. When interest rates are cut, it is relatively uneconomical to hold currency, and interest rates are expected to be lowered. The exchange rate of high-interest currencies is suppressed, and low-interest currencies have a hedging effect. Japan’s long-term low interest rates cannot be lowered. In times of crisis, other countries’ currencies may cut interest rates and depreciate. The yen is unlikely to cut interest rates, so the yen has taken a hedging.
    Official foreign exchange reserves (Euro red, Canadian dollar light blue, Japanese yen purple, British pound green, U.S. dollar dark blue)

(1) When risk aversion in the market is high, the most direct response is often: sell stocks (the stock market falls), withdraw borrowings (the dollar and the yen rise), and hold cash and high-security bonds (the price of US Treasury bonds rises) , The rate of return drops). One of the reasons behind the rise in the dollar and the yen due to the withdrawal of borrowings is the rapid expansion of arbitrage transactions in recent years. Since both the Japanese yen and the US dollar have become currencies with almost zero interest rates, many speculators seeking higher returns often borrow Japanese yen and US dollars and convert them into other currencies with higher yields for investment. However, when there is turmoil, these speculators often take the initiative or are forced to liquidate arbitrage trading, sell related currencies, buy U.S. dollars and Japanese yen to repay borrowings, resulting in an increase in the exchange rate of U.S. dollars and Japanese yen. Among them, the yen arbitrage transaction has a longer history and a larger scale, so the yen exchange rate tends to rise more frequently. Since buying yen is more of a passive liquidation transaction to avoid market risks, it may be more appropriate to call it “hedged”.

(2) Japan’s low interest rates make the yen the world’s lowest financing cost currency. Therefore, when investment opportunities arise outside of Japan, investors with high credit and excellent vision can easily obtain a huge amount of money from Japan. And cheap yen assets, plus the yen is a freely convertible currency, so it can be easily converted to other currencies, and then invested in its promising projects. To put it simply, if the global economy is improving and there are plenty of investment opportunities, the process of integrating into the yen and investing in other markets can be seen as selling the yen to buy other currencies, which should push the yen exchange rate down. This process may determine the length of time the yen is weak depending on the number of investment opportunities. However, once investment losses occur or the global economy faces problems, investment opportunities in countries other than Japan begin to shrink. At this time, these investors who lend out Japanese yen can only take profits or stop losses, and take the remaining currency in their hands. Converted into Japanese yen and returned to Japan. In simple terms, this process is to sell other currencies and buy yen, which of course will push up the yen exchange rate. This is similar to the one above.

(3) Japan is the world’s largest net creditor country. Since 1991, Japan has become the world’s largest net creditor country for the 23rd consecutive year. As of the end of 2013, the foreign net assets held by the Japanese government, companies, and individuals after deducting liabilities were 325 trillion yen, an increase of 9.7% from the end of the previous year. Except for the government’s foreign exchange reserves of more than US$1 trillion, most of the overseas assets are foreign direct investment and indirect investment (invested in financial markets) held by the private sector. Therefore, once the international financial market is turbulent, Japanese funds will also tend to withdraw part of their capital out of “home country preference” and return to the country, causing the yen to appreciate. (This doesn’t seem to be directly related to risk aversion, so let’s keep it.)

How to trade safe-haven currencies?

In trading, if the market is turbulent and triggers a strategy of trading safe-haven currencies, you should be aware at this time: Although they can all be regarded as safe-haven currencies, each currency may react differently to events. In addition, it should also be noted that the market does not always agree on which currency is the safe-haven currency.

How to trade safe-haven currencies

For example, some investors may regard the Norwegian krone as a safe-haven currency, believing that the country’s debt levels are low and current account surpluses; while others believe that the Norwegian krone is not a good safe-haven option: lack of liquidity, and Commodity currency correlation is too high.

In addition to currency, gold is also widely regarded as a safe-haven asset. Gold is regarded as a safe-haven asset because human history has proven that it can store value, and its market position and price are basically not affected by the central bank’s interest rate decision.
Safe-haven asset gold

The safe-haven currency has become the target of “snatch” in the financial crisis, making the countries of the safe-haven currency see a large influx of funds during the crisis, thus temporarily gaining a chance to breathe. But everything has its two sides, and “safe-haven currency” will also have side effects after the crisis. The appreciation of these safe-haven currencies during the crisis made them lose part of their export competitiveness. In fact, the crisis itself should adjust the economic structure through depreciation. At the same time, the effectiveness of the currency policies of safe-haven countries is also “disturbed.” . As a rational investor in the foreign exchange market, he should rank those safe-haven currencies and do his “homework” for safe-haven currencies while predicting the global financial crisis.