‘Safe haven’ is defined as a place of security or refuge in times of danger. In financial markets, safe haven assets are those which investors expect to withstand market-prevalent price volatility. Currencies provide a few such safe haven assets. Investors have historically considered three currencies as safe haven assets: the US dollar (USD), Japanese yen (JPY), and the Swiss franc (CHF).
British pound sterling (GBP) and the euro (EUR) may have been considered as possible safe-haven currencies in the past, but the price of both on international currency markets has been characterized significantly by volatility in recent years. The Australian dollar (AUS) and New Zealand dollar (NZD) are increasingly viewed as ‘risky’ safe haven currencies, having performed well since the Russian invasion of Ukraine in early 2022.
Safe-haven currency performance during economic downturns
Investors increase their portfolio holdings in safe haven currencies to offset market risk that other assets experience. For instance, stocks in equities may go through a severe period of volatility in times of recession. By transferring capital out of such unusually risky assets into a safe haven currency like the US dollar, investors are able to lower the risk of losses and diversify their portfolio further.
Safe haven currencies typically rise in price. It is essentially a snowball effect in that investors begin to move their money from risk assets into safety assets like the Japanese yen or Swiss franc. This causes the currency to strengthen, which in turn attracts more investors, and so on. Investors do have to be wary though. Safe haven assets tend to become artificially inflated as they provide financial security to investors fleeing risk assets. However, it is typically only a temporary measure. Knowing when to sell holdings in a safe haven currency is essential, before the currency experiences a large sell-off again and decreases in price in relation to other currencies.
How safe haven currencies have performed in 2022
Events and developments that have taken place in 2022 have led a majority of economists and investors to believe that a recession is looming. The massive rise in inflation across the world, including the USA, European Union, and UK, is the prime cause. The Russian invasion of Ukraine and the consequential rise in energy prices is another important factor. Investors have reacted to these developments by already changing how they invest.
US dollar performance in 2022
On 1 January 2022, the US dollar was worth 88 euro cents. It strengthened to reach parity in July for the first time since 2002. It briefly climbed to 1.01 in August, making it stronger than the euro. Between July and September, it has hovered between 0.98 and 1.01. With particularly severe recession predictions for the European Union, economists increasingly believe that the dollar could become considerably stronger than the euro towards the end of 2022 and into 2023. Against GBP, the dollar climbed from 0.74 in January to 0.87 in September.
Japanese yen performance in 2022
The Japanese yen, traditionally a safe haven asset, has not performed to its peers. This is largely because Japanese interest rates remain low, while the Federal Reserve, European Central Bank, and Bank of England, among others, have all begun aggressive interest rate hike cycles. In particular, investors have turned to the more attractive dollar-denominated assets.
USD/JPY has gone from 115 in January 2022 to 144 in September. USD/EUR, whereas EUR/JPY has gone from 130 to 144 for the same period.
Swiss franc performance in 2022
In June, the Swiss National Bank raised its benchmark interest rate from minus 0.75% to minus 0.25%. The strength of the US dollar has still made the greenback the safe haven of choice for investors. However, Switzerland’s predictably stable government, economy, and financial system is often a source of comfort for investors in turbulent times. Moreover, it is shielded from much of the economic volatility that besets the eurozone.
USD/CHF has gone from 091 to 098 between January and September. However, EUR/CHF has progressed from 1.04 to 0.97 for the same period, while for GBP/CHF it’s been 1.23 to 1.11.
NZD and AUD have emerged as alternative safe haven currencies in 2022. Both currencies have climbed against EUR, GBP, JPY, and many other currencies, and have even performed quite strongly against the market might of USD
In times of recession or when a recession looms, many investors may choose to diversify their safe haven currency holdings by allocating funds across USD, CHF, and others, such as AUD.
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