G10 FX: Safe havens - Rabobank

Measured on a 1 day view, the JPY is the best performing G10 currency followed by the CHF, the USD and the EUR and the first three of these currencies regularly feature in discussions regarding safe havens, with the EUR becoming very involved during the course of last year, explains Jane Foley, Senior FX Strategist at Rabobank. 

Key Quotes

“We have frequently argued that on paper the CHF is the best safe haven currency.  Although CHF liquidity cannot match that of the other currencies mentioned, it is ample.  This is a crucial determinant of a safe haven currency which, in our view, rules out currencies such as the NOK, SEK and assets such a bitcoin from playing the part of a true safe haven.  Switzerland also boasts a very solid budget and current account position as well as strong and stable systems of government and law.  However, only last Monday talk of SNB intervention was being heard in the market.  The SNB is unusual among G10 central bank in that it boldly maintains currency intervention as a policy tool.  Given the threat of being burnt by the central bank, it is not surprising that many buyers of safe haven currencies have instead turned their attention to the JPY this week.  That said we would argue that recent JPY gains may soon be unwound.”

“In times of crisis, investors are more concerned about having access to their funds then the rate of return. It follows that in period of heightening risk appetite the opposite is true and investors are more likely to chase yield in less liquid markets.  No one would argue that this week has brought a spectacular repricing of equity markets and that investors are coming to terms with the potential of higher inflation in the US. That said, the presence of strong fundamental factors has limited the impact in other asset classes.”

“Although there has been a detectable move into safe haven currencies this week, there are no signs of panic in the FX market.  In particular sentiment in high yielding EM FX markets has been holding up reasonably well.  This suggests that what has unfolded this week is an equity market correction not a broad-based and complete reassessment of risk.   Assuming that the calm that has settled over equity market sustains, USD/JPY is likely to drift higher chased by the continual reassurances by BoJ Governor Kuroda that he remains committed to the Bank huge QQE programme.”

“Kuroda’s assurances have been falling on deaf ears in recent weeks given speculation that the BoJ could start to back out of its QQE programme this year on the back of Japan’s strong growth performance. Ironically, on the back of this week’s stock market rout, the market may be better prepared to believe the messages from G10 central banks that the pace of monetary tightening will be slow and that the BoJ could be among the last to hang up its bond buying apron. It remains our central view that USD/JPY will end the year higher on the back of a widening in interest rate differential in favour of the USD.”

“Last year, the EUR periodically displayed safe haven behaviours. This followed a drop in perceived political risk and a strengthening of economic growth in the Eurozone.  Importantly the region has a large current account and Germany’s budget position is strong.  Noticeably, however, safe haven buying of the EUR last year was triggered by geopolitical events which had larger potential ramifications for the US and Asia than Europe and which occurred in a period of negative USD sentiment.”

“If demand for safe haven is instead triggered by concern that central bank tightening could impact liquidity provision significantly (a risk which we expect central banks to carefully manage), we would expect the USD to outperform the EUR. This is because of the sharp increase in the level of USD denominated loans to borrowers outside the US since the financial crisis.  Given that the market is currently coming to terms with high USD borrowing costs, the value of the greenback this week is a useful litmus test of broader market sentiment. Higher yields in the US should also bolster the outlook for the USD more generally going forward.”