Safe Haven Assets In Forex: What They Are & How To Trade Them
There is a saying, often used in various financial markets, that fortune favours the bold, but this is only true when the markets also favour the bold.
The aphorism, a translation of “audentes Fortuna iuvat” from Virgil’s epic poem the Aeneid, was often used ironically; it was used by the antagonist Turnus in that poem, and was attributed by Pliny the Younger to his uncle, Pliny the Elder, just before he went on a doomed voyage towards
Mount Vesuvius to rescue his friend Pomponianus.
Fortune, therefore, favours not the foolhardy but those with an educated confidence in their understanding of the prevailing winds, and perhaps nowhere is this more important than in forex trading.
Whilst anyone can make money during a bull run, when the market or specific elements of it are increasing in value, it is the opposite situation that proves the difference between traders and gamblers.
Knowing how to minimise losses and make small gains when the market is trending downwards is the key to making money in forex, particularly ito instant funding to make trades.
A key to this is to understand where money flows to when bearish sentiment runs rife, which typically involves a flight to quality and to safe haven assets.
What are they? Which assets are safe havens in forex? How did they get their reputations? And how can you take advantage of the flight to quality to make effective trades?
What Are Safe Haven Assets?
It can sometimes be helpful to see money markets as like a current; capital flows in waves in one direction or another.
During bull markets, money tends to flow into the stock market more broadly, or into emerging growth markets in forex, where there are opportunities to make money through savvy, brave investments.
By contrast, during a bear market, the money often flows away from risky investments and back into stores of value or slow-yielding safer investments where the value is unlikely to fluctuate.
This is known as a flight to quality or flight to security; it is the institutional movement into secure, safe assets either within a particular market, or outside of volatile markets entirely in favour of less risky assets with more conservative but more stable returns.
Outside of forex, it is often characterised with a movement away from stocks and into bonds, the former representing company ownership, whilst the latter represents a type of distributed loan that is characterised as a safer investment in a more difficult financial climate.
Other assets seen as safe havens include government bonds, marketable securities and other cash equivalents. All of these varying types of safe haven assets are often part of a diversified portfolio to avoid particularly great shocks to the financial system.
The 4 Key Characteristics Of Safe Haven Assets
Highly Trusted: The market recognises them as a key store of value.
Fundamentally Stable: The value of the asset is not broadly affected by changes in the market.
Broadly Liquid: The demand and supply are such that they can be bought or sold without delays or major market fluctuations.
No or Little Correlation to Risk: A safe haven asset is not connected to more risky asset types. This has historically stopped cryptocurrencies from being treated as safe haven assets.
What Are The Most Common Safe Haven Assets In Forex?
The nature of forex and currencies more broadly means that a safe haven asset is often found with a currency that is seen as politically and economically stable, particularly in contrast with other currencies that are seen as more volatile and potentially more lucrative investments.
Technically, any major world currency that is not at risk of severe devaluation or hyperinflation is often considered to be a safe haven asset in the context of the overall market. However, for forex investors specifically, there are four main safe haven assets to consider.
US Dollar
Whilst the chaotic geopolitical and economic situation in the United States has shaken the dollar’s standing on the global stage somewhat, it has led to serious discussions about whether the euro or the Chinese yuan may potentially replace it as the world’s currency.
However, from the establishment of Bretton Woods until the present day, the dollar has remained a safe, secure currency and a typical part of most forex portfolios. It is the de facto world currency, used for most business deals.
Swiss Franc
Perhaps the ultimate safe haven currency, the Swiss franc benefits from Switzerland’s long-entrenched neutrality politically and financially.
The country is politically stable, has a firmly rooted system of laws built around referendums, a relatively low crime rate, a famously non-interventionalist foreign policy, low inflation and a familiar business culture for many Western companies and investors.
In fact, the Swiss franc was so popular as a safe haven currency that it actually hurt Switzerland’s export-driven economy. They abruptly pegged the franc to the euro for nearly five years before just as abruptly removing the peg.
Japanese Yen
A safe haven for very different reasons, the Japanese yen is generally considered to be a currency that is weak in strong global markets and strong during downturns.
However, the very unique financial and cultural elements that have driven changes in the yen since the bursting of the Bubble Economy and the rise of the Lost Decade make it an almost infamously difficult currency to trade.
Gold
Finally, it is very difficult to discuss safe haven assets without talking about gold, arguably the ultimate store of value and fundamentally safe commodity on the financial market.
In the past, gold was seen as the ultimate store of value, to the point that most currencies used some form of convertibility to gold as their basis of value, and the Bretton Woods system, which made the US dollar the central currency of the world, was based on its convertibility to gold.
Whilst it should never be at the core of any portfolio, it is often popular as insurance.
How Should You Trade Safe Haven Assets In Forex?
Time safe haven trades carefully during periods of market instability. Follow wider trends and use fundamental and technical analysis to plan entry and exit points.
Play the long game and trust your instincts when it comes to risk aversion.
Do not limit yourself to just one safe asset; use a basket of safe havens.
Use currency pairs to invest in a safe currency at the expense of a somewhat riskier one.
Be aware that during bull markets, you will get much lower returns and lose your ability to be flexible.