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Safe haven currencies are currencies that are expected to retain or increase in value when it seems like the world is coming to an end (geopolitical stress).

The U.S. dollar (USD), along with the Japanese yen (JPY) and Swiss franc (CHF) are considered safe-haven currencies.

When there’s a lot of uncertainty in the world. there is usually a “flight to safety” to one or all of these currencies.

A safe haven currency tends to strengthen when risk assets sell-off.

Safe Haven Currencies

 

There are two fundamental reasons for a currency to be defined as a safe haven.

  1. The country or region should own a large amount of foreign currency assets, meaning they may sell those foreign assets and bring money back home when volatility picks up and risk markets are weak.
  2. FX traders, knowing that certain currencies have strengthened in the past during times of “risk off”, may buy those currencies in anticipation they would react in the same way as they have done historically.

U.S. Dollar

Strength in the U.S. dollar is an indicator of “risk off” sentiment.

If the U.S. dollar (USD) is stronger against higher-yielding currencies, markets are likely not happy about recently released economic data or news.

If that’s the case, then their response would be to seek the safe haven of the U.S. dollar.

Foreign investors may also be looking to buy U.S. Treasuries as a safe haven, and in order to buy those, you need USD.

If you don’t have any USD, then you have to buy some  When lots of investors do this all at once, this causes USD to rise.

Swiss Franc

The Swiss franc is another currency that is considered as a safe haven currency.

Political stability, sound fiscal and monetary policy, and a steady economy make the CHF a safe haven currency to which international investors return in times of crisis.

Despite the many crises that have occurred in the past in the global financial markets, Switzerland has always managed to hold firm without too much trouble.

If the Swiss franc (CHF) is stronger against higher-yielding currencies, there is market turmoil somewhere, probably in Europe.

If that’s the case, then currency traders will flee to the perceived safety of the CHF.

Such price action from CHF would indicate a “risk off” environment.

Japanese Yen

Strength in the Japanese yen is another indicator of “risk off” sentiment.

If the Japanese yen (JPY) is stronger against higher-yielding currencies, markets are likely not happy about recently released economic data or news.

Especially if it’s data or news related to the United States.

If that’s the case, then their response would be to seek the safe haven of the Japanese yen.

Specific currency pairs to monitor are AUD/JPY and NZD/JPY due to their popularity as carry trades, which is considered a “risk on” type of strategy.

Sudden drops in AUD/JPY and NZD/JPY signal risk aversion.

If you start AUD/JPY and NZD/JPY rise though, this suggests that risk sentiment has shifted back to “risk on”.

RORO

RORO stands for “Risk OnRisk Off” and describes a market environment where price behavior responds to and is driven by, changes in risk tolerance by investors and traders.

According to RORO, safe haven currencies will strengthen in “risk off” periods.

Conversely, in “risk on” periods, safe haven currencies will decline in value relative to commodity-based currencies such as the Australian dollar (AUD, New Zealand dollar (NZD) and Canadian dollar (CAD).

Such movements cause volatility in the currency markets.