What is a safe haven coin?
A safe haven currency is a currency that is considered safe during geopolitical and economic turmoil. Consequently, when events such as natural disasters, wars and stock market crashes occur, currency traders invest in safe havens, causing the value of the safe haven currency to rise and the value of the currencies paired with it to decrease. , even though the events have not occurred. had an obvious impact on the currency in question.
What does a safe haven coin do?
Due to the popularity of the carry trade, interest rate differentials have often been associated with safe haven status. However, this trend is not consistent across the market as it only appears to be a factor when trading the currencies of advanced countries as opposed to emerging countries. This implies that the liquidity of the currency being traded is a factor driving the safe haven status, as the major currency pairs are more liquid than the exotic currency pairs.
Also, when global risk aversion is high, liquidity in some markets can run out, causing traders to invest in highly liquid currencies. In turn, this gives more liquid coins an extra boost.
For a country to be considered safe and low risk, it must be insulated from global events in the event of a crisis, and it must have good fundamentals such as sound economic management and a strong industry. In theory, the currencies of those countries could be considered safe haven currencies.
In practice, it is increasingly difficult to achieve isolation in an increasingly globalized world. Therefore, factors such as the size of a country’s equity market, which indicates its financial development and the size of the market, now appear to outweigh the external vulnerability associated with its net foreign asset position.
What currencies are considered safe havens?
USD, CHF, and JPY are known as safe haven currencies. However, due to the carry trade, the fact that the Japanese yen rises in times of global turmoil is more likely to be a reversal of investors’ carry trades (which are often long in a currency with a high interest rate versus to currencies with low interest rates). , like the yen) rather than an intentional investment in the currency.
The CHF is considered a safe haven currency for several reasons:
1. Liquidity: The Swiss franc is a very liquid currency and is paired with the US dollar.
2. Switzerland has a highly competitive business environment, along with low corporate tax, a transparent economy, and a record of good economic management.
3. Switzerland is traditionally neutral and is therefore considered less likely to be affected by political turmoil in Europe than the euro.
4. The Swiss National Bank holds a large part of its reserves in gold, which causes the CHF to appreciate with the price of gold.
Although the CHF briefly fell out of favor in the global financial crisis due to its exposure to the banking sector, it has since regained its position as a safe-haven currency and has attracted investors such as various struggling eurozone members.
Why is the USD a safe haven currency?
If we look at the factors that contribute to a currency being a safe haven, the United States and the dollar fall short. The United States is not isolated from world events, as it has major trading partners in North and Central America, Asia, and Europe. The United States has not fully recovered from the financial crisis, with unemployment still around 10% and growth has slowed again during the three quarters to June 2011.
So why are currencies like the AUD and CAD, both from countries that did not experience a banking crisis or recession, and have strong economies and lower unemployment rates than the US, be considered safe haven currencies? sure?
The AUD, CAD, and NZD are commodity currencies, which means that since commodity exports contribute heavily to your GDP, they generally benefit from strong commodity prices. Strong commodity prices are encouraged by a global economy, which means that when the global economy could be in jeopardy, these currencies lose value as investors seek safe havens.
Which brings us back to the question: why is the USD a safe haven currency?
The main reasons for this are the size of the US economy, including the widespread use of the USD globally, the belief in the USD as a safe haven currency, and the liquidity of the USD.
Most Forex trading involves the US dollar: the major currency pairs are all paired with the USD, and the formulas for calculating exchange rates between crosses (currency pairs that do not contain the USD) use the exchange rate of the USD. As liquidity is the way that short-term forex traders make their profits, a lot of long and short trades are constantly being made on the USD. In a risk-averse environment, we have already said that liquidity in some markets is depleted. This causes more traders to invest in the more liquid currencies, of which the USD is at the top of the heap.
With the USD being regarded as the world’s leading safe-haven currency for years, the market is feeling that the USD is safe, regardless of what current economic data may show. This is one of the reasons the US dollar strengthened in 2008 despite the financial crisis: it was still considered safer than other markets.
The main reason the USD is considered a safe haven currency is that the USD is “too big to fail.” There are currently more US dollars in circulation around the world than any other currency, with two-thirds of the rest of the world’s foreign reserves being denominated in US dollars. If the USD falls too low, it will have ramifications on global markets. The dominance of the USD and the dominance of the United States in world trade means that other central banks will not allow the dollar to fall.
