Safe haven currencies fact or fiction ?

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on September 24, 2018 – September 30, 2018. Featuring Stephen Innes Head of Trading Asia Pacific at OANDA 

It has been a roller-coaster ride for the global financial markets this year. Rising trade tensions, greater geopolitical risks, slowing growth and higher interest rates are all coming together to make it an even more challenging year for investors.

The unravelling Turkish lira crisis saw the currency plunge 17% in August. From January to August, the lira lost 44% of its value, making it the worst performing currency in the world so far this year. This has put financial markets on edge and the contagion is spreading to other emerging-market currencies

There is a growing view that there has been a shift in the perception of what constitutes safe-haven currencies as the traditional ones are no longer as compelling. A case in point is when the Dow Jones Industrial Average and the S&P 500 recorded one of their sharpest dives since 2011 in February, the US dollar did not see the kind of activity that it used to.

Stephen Innes, head of trading for Asia-Pacific at currency solution provider Oanda, is of the view that traditional go-to currencies such as the yen and Swiss franc have lost some of their appeal. “We saw an escalation in regional tensions during the Korean peninsula crisis last year, which was a big deal for investors initially. When the rockets started firing, the markets immediately went to the yen, which traditionally has been a safe haven,” he says.

“They do this simply because of the proximity of Korea to Japan and the fact that there is strength in the yen. It is the typical go-to trade when risk aversion happens. Japanese traders are so prominent internationally that they too want to defend any heightened risk aversion and bring funds back home,” he adds.

“However, what we have seen lately is that this energy has somewhat weakened, in the sense that safe-haven currencies no longer have the same appeal they used to, perhaps because the political tensions occurring right now seem to have a very short shelf life. They can dissolve very quickly. So, when traders start to see risk aversion, they start buying risk-averse assets instead (such as US bonds), and that is supporting the overall markets.

“We have seen many crises over the last few years and traders are taking the view of, ‘Okay, we have seen that before. What’s next?’”

When traders and investors buy into risk aversion, they bypass the need to park their money in safe-haven currencies, says Innes. “Typical safe havens have lost their lustre. Take gold, which used to have a huge safe-haven appeal. But now, investors do not seem to care that much,” he adds.

“This seems to be the case with safe-haven currencies. Investors are quite comfortable parking their money in the US dollar now because of the rising interest rates and US equity markets do not seem to want to stop moving up.”

The Swiss franc — long considered a safe haven currency — has gone through upheavals of its own. In 2015, the Swiss National Bank shocked financial markets when it removed its currency peg to the euro.

The panic reaction to the “Frankenshock” saw the Swiss currency surge 30% against the euro and sent stocks plunging. So far this year, even with the rising trade war tensions, analysts observe that the Swiss franc has weakened against the euro.

Innes points out that currencies such as the Swiss franc, euro and pound sterling are not performing as they did in the past. “While I think the Swiss franc has some safe-haven appeal due to its neutrality in Europe, the appeal has diminished as markets are still suffering due to the fallout from the Swiss National Bank crisis. Confidence has been impacted.”

Stephen Innes, head of trading for Asia-Pacific at currency solution provider Oanda, says it has become more challenging to hedge financial risks with traditional safe havens not reacting the way they once did. “We have seen safe havens perform quite well in the past when risk escalates. But now, it gets to the point where it would only be a knee-jerk reaction and then the problem dissipates. Sometimes investors can get caught in these knee-jerk reactions when they move into these safe havens while traders are sitting at the bottom, waiting to taking advantage of the depressed levels,” he adds.

“Provided that the US economy is going to be robust, the markets are pretty comfortable buying risk at any juncture, even political or a big escalation in tensions in the Middle East or another escalation in the Korean peninsula. If there is a sell-off in the markets, I think investors — knowing that this will probably be part of the global growth in the next few years — are still willing to buy, even in risky markets. I think investors have deeper pockets these days, whereas the Asian economies are nowhere nearly as risky as they were 10 years ago.”

That is why typical riskier currencies still have appeal in the markets when they are wobbly, says Innes. There are no huge sell-offs like before and this translates into less of a need to retreat to safe havens for institutional investors.

“Markets and investors tend not to be panicky now. As the US economy is doing so well, what investors are willing to do is continue adding US dollars when there is risk,” he says.

“Investors are now ready to see the light at the end of the tunnel and actively re-engage local economies again, realising that we are not going to have another Asian financial crisis. The economies are sturdier and the currencies are a lot better.”

He adds that investors are looking for opportunities to re-engage riskier assets such as those in emerging markets, like China. “Investors are set to re-engage with the likes of Malaysian stocks and Asian markets. These are so-called riskier markets, but there is still a lot of appetite and anticipation that Asian markets will continue to grow.

“There is going to be wealth creation [in this space]. What is going to happen ultimately is that people will get wealthier. And as they do so, their appetite for more expensive products will grow. This adds to the underlying economic fundamentals [of a country] on the base level. That is why people are maintaining a bullish attitude despite the fact that trade tensions could escalate.”

However, if there is a meltdown in the global equity markets, the flows will go back into traditional safe havens such as the yen because ultimately, that big shake in the markets will still result in investors trying to find a safe hiding place, says Innes. “That is when traditional safe havens will come back to the fore again. Right now, that is not happening,” he adds.

“We are not seeing negativity in the equity markets, especially with the economic policies put together by the Trump administration, like tax breaks for large corporates which, in theory, should bump up corporate profits over the next couple of quarters. So, investors still feel comfortable buying into the US markets.”

Cover Story Edge Markets Malaysia

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes