Safe haven currencies are currencies that are expected to retain or appreciate in value when the world appears to be ending (geopolitical stress).
The
United States Dollar (USD), Japanese Yen (JPY), and Swiss Franc (CHF) are considered safe-haven currencies.
When there is a lot of uncertainty in the world. There is usually a “flee to safety” for one or all of these currencies.
When risk assets sell off, safe-haven currencies tend to strengthen.
If the United States Dollar (USD) strengthens against high-yielding currencies, the market may not be happy with the recently released economic data or news.
If this is the case, then their response is to seek the safe haven of the US dollar.
Foreign investors may also want to purchase U.S. Treasury bonds as a safe haven, and in order to purchase these bonds, you need U.S. dollars.
If you don’t have dollars, then you have to buy some. When many investors do this at the same time, this causes the dollar to appreciate.
Swiss Franc
The Swiss Franc is another currency that is considered a safe haven currency.
Political stability, prudent fiscal and monetary policies, and a stable economy have made the Swiss franc a safe-haven currency that international investors return to in times of crisis.
Despite numerous past crises in global financial markets, Switzerland has always held its ground without running into too much trouble.
If
the Swiss Franc (CHF) strengthens against high-yielding currencies , there will be market turmoil somewhere (probably Europe).
If this is the case, then currency traders will flee to the perceived safety of the Swiss franc.
Such price action in the Swiss franc would indicate a “risk-off” environment.
Yen
A stronger yen is another indicator of “risk-off” sentiment.
If the yen strengthens against high-yielding currencies, the market may not be satisfied with the recently released economic data or news.
Especially data or news related to the United States.
If this is the case, then their response is to seek the safe haven of the yen.
Specific currency pairs to monitor are AUD/JPY and NZD/JPY as they are popular as carry trades, which is considered a “risk on” type of strategy.
A sudden decline in AUD/JPY and NZD/JPY points to risk aversion.
If AUD/JPY and NZD/JPY start to rise, this would indicate that risk sentiment has returned to “risk on”.
Rolling
RORO stands for “Risk On, RiskOff” and describes the price action response and is caused by, RiskChanges in investor and trader tolerance.
According to RORO, safe-haven currencies will strengthen during “risk-off” periods.
Conversely, during “risk-on” periods, safe-haven currencies will depreciate against commodity currencies such as the Australian dollar (AUD, New Zealand dollar (NZD) and Canadian dollar (CAD)).
Such changes can cause currency market volatility.
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