A safe haven currency is a type of currency that is able to either retain or increase its value even in times of market and geopolitical crises.
Some of the major currencies globally that are considered to be safe haven currencies include the U.S Dollar (USD), Swiss Franc (CHF), and, the Japanese Yen (JPY).
Whenever there are high market fluctuations or other geopolitical uncertainties globally, many people tend to turn towards (invest) in these safe-haven currencies.
Safe haven currencies usually tend to gain more strength against contemporaries when the market or geopolitical risks increase.
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RORO stands for the term “Risk On, Risk Off.” It usually describes an environment where the price of currencies is driven by and responds to changes in the risk tolerance of traders and investors.
According to RORO, currencies that are considered safe-haven tend to perform better and strengthen during “risk off” periods.
On the other hand, during “risk on” periods, currencies that are considered safe haven will decrease in value compared to currencies that are driven by the prices of commodities such as the Australian Dollar (AUD), New Zealand Dollar (NZD), and, the Canadian Dollar (CD).
What Are Some of the Key Things That Can Make a Currency a Safe Haven Currency?
There are two main things that can make a currency be considered a safe-haven currency. They are:
• The country which owns a currency should have invested a significant amount in foreign currency assets. In times of market or political or market volatility, the country that owns the currency can sell the foreign assets that they have invested in and shore up their own reserves
• A currency can also become a safe haven currency if forex traders in the full knowledge that the currency has performed well in the past buy a currency in anticipation that it will perform in a similar manner during volatile time.
What Makes the U.S. Dollar (USD) a Safe Haven Currency?
The increase of the strength of the USD usually indicates that there is a “risk off” sentiment in the markets.
If the USD gains strength against other high-performance currencies, it is usually an indication that the markets are not happy about market news or economic data that may have been released in the recent past. When the markets are not happy about economic data, they may seek to shore up their assets by investing in the USD.
Other foreign investors may also be looking to buy U.S. treasury bonds. To do this, investors have to first purchase the USD. When many investors buy the USD all at once, it usually leads to the rise in the value of the dollar.
What Makes the Swiss Franc a Safe Haven Currency?
Some of the key things that make the Swiss Franc (CHF) a safe haven currency is the fact that Switzerland has great political stability, a steady economy, and, a sound fiscal and monetary policy. This is the reason why many investors turn to the CHF in times of market and geopolitical turmoil.
If the forex indications show that the franc is performing better than other high-performance currencies, then it is usually an indication that there is economic turmoil somewhere in the globe, most likely in Europe. In such times of turmoil, most investors shore up their investments by betting on the Swiss franc. This usually indicates that there is a “risk off” environment in the markets.
Also Read: What to Invest in During a Recession
What Makes the Japanese Yen (JPY) a Safe Haven Currency?
Whenever the JPY gets stronger, it is usually an indication that there is a “risk off” sentiment in the market.
Just like the USD, whenever the JPY is performing strongly against other high-performance currencies, it is usually an indication that the market is not happy about economic data that was released recently especially if the data concerns the markets in the United States.
Whenever there is bad economic news about the U.S. most investors tend to hedge their assets by investing in the Yen.
Some of the currency pairs that you should constantly check as investor are the Australian Dollar & Japanese Yen (AUD/JPY) as well as the New Zealand Dollar and Japanese Yen (NZD/JPY). Sudden drops in either currency pair usually shows an aversion to risk in the markets. If either currency pair starts rising it is usually a signal that the markets have shifted to “risk on.”