G10 FX: Evolution in safe havens? - Rabobank

The recent surge in tensions between the US and North Korea has sparked a debate about whether investors’ perceptions regarding which currencies constitute a safe haven are changing, points out Jane Foley, Senior FX Strategist a Rabobank. 

Key Quotes

“We would argue that it will be a long time before the crowns of the CHF and the JPY are toppled.  That said, this year’s rotation back into the EUR and this year’s relative deterioration in USD fundamentals supports that view that the single currency will do better than the greenback on any resurgence in hostilities between President Trump and Supreme Leader Kim Jong-un.”  

“We have frequently reviewed the relative merits of the CHF and the JPY as safe havens currencies.  Regular readers may be aware that on paper we see the CHF as the best safe haven currency.  Switzerland runs a large current account surplus and a close to flat budget position.  It goes without saying that Switzerland boasts political stability and a strong judiciary. Also, despite CHF strength (or perhaps because pressure to work around it) Switzerland is frequently named the most competitive economy on the planet.   Crucially, there is also a good level of liquidity in the CHF. This factor suggests that currencies such as the DKK, SEK or NOK can never be true safehaven despite their strong respective fundamentals.  Although in times of crisis investors lose interest in relative returns, they still need reassurance that they can have quick access to their funds.  Consequently some funds will shun illiquid currencies.”

“There have been periods in the past when speculators have attempted to use the NOK as a safe haven.  Ahead of the 2014 dive in oil prices, the country’s wealth had resulted in a very strong set of fundamental factors.  However, the NOK lacks the liquidity that helps to define a safe haven currency.  Over the past month, the NOK has performed well.  However, it has lagged well behind the JPY and the CHF since the start of August suggesting that the better tone this summer has less to do with safe haven flow and more to do with improving fundamentals and expectations for a slightly more hawkish central bank.  A similar argument can be made to describe recent movements in the SEK.”