Trading Tips: Some Insights into Trading Safe-Havens

One of the most common reasons to trade in the forex or commodities market is to provide a safe-haven for one’s equity during times of economic or political uncertainty. Learn some basics of trading the US Dollar (USD , Swiss Franc (CHF), Japanese Yen (JPY) and Gold (XAU).

Trading Tips: Some Insights into Trading Safe-Havens

Trading Tips: Some Insights into Trading Safe-Havens

When investing in an online forex trading account, it can be confusing for a new trader to decide which of the dozens if not hundreds of different assets to trade.

Focusing on a few or even one can give a beginning trader some focus so they can develop “an edge” by which they get a feel for how a certain asset acts in contrast to trying to understand the particulars and patterns of every asset.

Some of the most popular assets (also called instruments) to trade are assets considered “safe-havens.”

Let’s look at what’s considered safe-havens and some reasons why and how some traders might trade them.

Safe-haven currencies are those currencies that would be predicted to retain or increase value in times of political or economic uncertainty and therefore market instability. Safe havens can have a reverse correlation to the performance of stocks (equities) or bonds and are attractive to investors, speculators, banks and nation-states in the event of market downturns and even crashes.

What qualifies a currency or other asset as a safe-haven?

Two major factors are its actual and perceived stability and liquidity.

The United States Dollar (USD) is the most used currency for international transactions often exceeding 80% of all transactions in recent years. International agreements made at the conclusion of World War Two gave the dollar prominence over all other currencies when the USD was backed by American gold reserves and the United States emerged as the only remaining capitalist world power. Since 1971, the USD lost some of its shine when the US left the gold standard though it still persists as the world’s largest economy with the world’s largest military for protection of its interests at home and overseas. As such, the USD through purchases of US Treasury Bonds or the USD can be an attractive asset when other currencies seem suspect. The most commonly traded currency pair involving the USD is the EUR/USD trading the Euro against the US dollar. Selling the EUR/USD is the same as buying (or being “bullish” for) the USD.

The Swiss Franc (CHF) has also been a traditional safe-haven currency. The stability of the Swiss government, the maintenance of its political neutrality, the long term strength of its economy, its long term low rate of inflation, the lack of foreign debt and a positive trade balance have all contributed to its consideration as a safe-haven. Switzerland’s role as a banking and finance center also means the CHF is a commonly traded currency. In 2011, the USD and EUR both fell dramatically against the CHF as a reaction to those two regions were climbing out of a financial crisis.  The Swiss Franc lost some of its luster for many foreign banks and investors as a safe-haven however when in 2015, Swiss banks abandoned their cap on the price of the Swiss Franc against the EUR.  In short, this caused a huge short term movement in the CHF’s value that undercut its safe-haven status. The USD/CHF pair and EUR/CHF are commonly traded pairs and the USD/CHF pair is a carry trade meaning buying the USD/CHF has no overnight interest charges so traders can carry that trade long term without the “swap” costs most other currency trades occur.

Additionally, the Japanese Yen (JPY) has often been used by foreign investors as a safe-haven currency. During the 2008 international financial crisis and the collapse of the British Pound (GBP) during the uncertainty about Brexit, the JPY had great gains against the USD and GBP respectively.

Japan’s role as a major exporter, the world’s largest creditor nation and that like the USD/CHF, the USD/JPY buy is a carry trade with no overnight interest has attracted many investors to trading the JPY. With low or negative interest rates at home, many Japanese citizens and institutions invest overseas. In times of perceived risk, money is often repatriated from foreign markets and other investments which would then typically boost the value of the JPY.

trading safe haven

Since the USD and JPY can both attract safe-haven investors and the USD/JPY pair can sometimes be absent of strong moves, the GBP/JPY, AUD/JPY or NZD/JPY are some alternative currency pairs for JPY traders who want JPY pairs with larger potential movement ranges. To use the JPY as a safe-haven, a trader would sell these pairs which in effect would be being bullish on the JPY. Traders of the JPY should be wary of such events as the Japanese government devaluing the currency to keep exports competitive as well as disasters such as earthquakes, tsunamis or nuclear mishaps that in the past have rattled the Yen.

Last but not least, traders often trade on Gold (XAU/USD) as a safe-haven asset. During times of risk, gold is often seen by many as the least risky asset to hold until the risk subsides. When interest rates are high on treasury bonds from central banks or the markets have increased levels of confidence, gold may be less attractive but periods of low or negative interest rates, fears of risk in the market and political instability can all drive up the price. Unlike the CHF or JPY, there are no carry trades involving gold.

Fears in 2020 that there may be a lurking international recession or market crash have been part of driving gold to seven-year highs with talk of it exceeding its all-time highs by the end of the year if and when those perils happen. To invest in the XAU/USD as a safe-haven, a trader might buy this pair expecting the value of gold going up. If a trader thought fears might subside or it was overvalued they might sell this pair expecting the value to go down.

To understand what trade size has what potential profit and risk for what size investment, you can consult one of CM Trading’s Market Analysts.

If you do not already have an account with CM Trading, you can register here.

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