There are 4 assets that considered as safe haven assets: gold, JPY, CHF, and USD. When something unexpected occur, those assets will help you to keep alive.

safe heaven

In news related to currencies, we will often heard about how some currencies got stronger following times of conflicts and turmoil.

These currencies are dubbed as safe haven currency, which usually refers to:

  1. Japanese Yen
  2. Swiss Franc
  3. US Dollar
  4. Gold

They are believed to have relatively stable value by investors all around the world. Or so they said.

 

How Safe Haven Currency Became Safe Haven

When a certain event boosted risk exposure on many assets, investors will move into what they consider as relatively safer assets. These unexpected occurrences may refer to armed conflicts, geopolitical tensions, natural disasters, or others, that may inflict broad influence in the financial market.

An European Central Bank working paper by Habib and Stracca on the topic sought whether safe haven status can be explained because of three reasons: First, a currency may be a safe haven if the country issuing it is itself safe and low-risk.

Second, the size and liquidity of a country's financial market may support a safe haven status because when global risk aversion is high, market liquidity may dry up and most liquid markets may get an additional bonus.

Third, financial openness and more generally financial globalization. But the research found very few variables entering consistently and robustly as determinants of safe haven status, and even those which enter significantly have a rather small effect on monthly currency status.

So, is the safety provided by safe haven currency merely perceived safety or an actual one? Before we discuss that, let's get to know more about the big 4 safe haven assets below.

 

4 Most Popular Safe Haven Assets

There are 4 most popular assets that are considered safe havens. What are they?

 

1. Gold

Gold may be considered as the ultimate safe haven, not only in the forex market but in the financial market as a whole. The precious metal is no longer used as a currency in the modern world, but forex traders usually trade the commodity paired with currencies like US Dollar and Euro, hence it is often moved up when unexpected events boosted risk in the market.

Even more, a drop in gold price may be indicative of a growing risk appetite in the market. As long as demands on gold as a safeguard of wealth remain, then Gold most probably will stay as safe haven.

 

2. Japanese Yen

The next safe haven is the Japanese Yen. For decades, the currency has been known to maintain stable value and fundamentals, most notably a strong trade surplus and high GDP. The facts have slowly shifted in recent times, but many people still consider it as one of the safe havens, as shown by the Yen appreciation following several risky moments in the past year.

However, there have been many questions in regard to the Japanese Yen's role as safe haven in the last few years due to the country's stale economic growth and the government's program to depreciate their own currency.

 

3. Swiss Franc

Previously, Switzerland maintains a minimum of 40% gold reserves for the Swiss Franc. The rule was discarded in March 2005 when the Swiss National Bank held 1,290 tonnes of the gold reserve or an equal of 205 of its assets. A referendum that proposed to restore 20% gold reserve failed to gain votes in November 2014.

Originally, the Swiss Franc gold reserve and low inflation have made it into one of the world's leading safe haven. However, with the dismissal of the old system, the country's central bank's strict control means that it's prone to drastic changes without even a moment's notice.

In addition, the country is currently dragged down by Eurozone slumps and recently adopted a negative interest rate. These factors take the Swiss Franc's safe haven status into question.

 

4. US Dollar

Considering its status as the currency of one of the top economies in the world with a well-established financial system and super liquidity, there is not many that wonder why US Dollar can be dubbed as safe haven currency. US Dollar is the most traded currency in the world.

Furthermore, its economic growth is projected to grow faster in the coming periods, making the currency into a good bet in short, mid, and long-term at once. However, as prior financial crises have shown, the US Dollar's safe haven status is as temporary as any others.

 

Conclusion

It needs to be noted that gains on assets with safe haven labels are usually temporary. Unexpectedly risky events will stay unexpected only for a short time. Afterward, investors will start pricing in the risks that came with the event, and rearrange their portfolio again.

Safe haven currency, in this sense, is just a harbor during a heavy storm, from which the boats will sail again after the sky clears up. Besides that, the safe haven term is not actually definitive of these four assets alone (Japanese Yen, Swiss Franc, US Dollar, and Gold), because some assets could be safe at some time and not at others.

So, what is the use of knowing safe haven currency, if their so-called safety is all just so-so anyway?

Well, it is always useful to know market notions on things. When something unexpected occurs, at that instant you'll know what to do in regard of the trades you have opened and the trades you will open in the next session.

The knowledge on safe haven currency will also be useful for any investor who seeks to build a proper portfolio. The key point here is you will not make the mistake of thinking a price bounce will last or a trend will be terminated just because a surprising event triggered panic in the market.