What are safe haven currencies? Do you need them in your portfolio?

What are safe-haven currencies? Do you need them in your portfolio?

Creating a successful trading strategy takes time. You need to be able to make mistakes while exploring the options that work for you and the ones that don't. During that process, you might decide to trade a variety of markets and instruments - and you may be less familiar with some of them.

Of course, there are risks and rewards involved when you adopt this approach and, when the markets do go against you, it's important to be able to fall back on assets that you deem to be more dependable. In the world of forex, these are known as safe-haven currencies.

But what exactly are safe-haven currencies? What are some examples of safe-haven forex pairs? And what do you need to know before you start trading them? Read on to find out more with FXCM.

What are safe-haven currencies?

Safe-haven currencies are those on which traders rely to minimise their exposure when the markets are showing signs of instability. As a general rule, they are expected to retain their value in the face of a downturn. And in some cases they are negatively correlated to the market as a whole, meaning that they may actually appreciate in value as other assets are losing theirs. The typical characteristics of a safe-haven currency are:

  • High liquidity
  • Economic growth in the country
  • A stable political landscape
  • Permanence and assurance of demand

Examples of safe-haven forex pairs

Safe-haven forex pairs consist of at least one safe-haven currency, which allows traders to execute lower-risk deals because they can leverage the greater stability of that currency. The US dollar, Swiss franc and Japanese yen are all widely considered to offer safe-haven status. Meanwhile, some common safe-haven forex pairs include:

But before we can talk more about pairs and how you can trade them, we need to understand why some currencies are considered safe havens and others aren't.

Why is the USD a safe-haven currency?

The US dollar is a safe haven because it is the most liquid currency on the global market. The Bretton Woods agreement, signed in 1944, established the USD as the world's primary reserve currency thanks to the country's huge gold reserves. It has retained that position to this day, even though the Bretton Woods system was abolished between the late 1960s and early 1970s.

US Treasury securities are also thought of as a safe vehicle for investors, while the nation's economy has rebounded impressively from recent recessions. Those factors, combined with a stout political system, means that the US dollar stands out as a safe-haven currency.

Why is the Swiss franc a safe-haven currency?

Switzerland has an extremely well-developed banking industry, while there are also political factors that make the franc a safe-haven currency. The nation's neutrality and independence from the European Union (EU) mean that it has been a popular target for investment amid periods of political or financial instability.

The Swiss franc is also highly liquid and is in constant demand. The Bank for International Settlements' Triennial Central Bank Survey tells us that the CHF is involved in 5% of all forex trades. It ranks seventh on that list, with the USD (88.3%) comfortably ahead of the Euro (32.3%) and the Japanese yen (16.8%) in the top three.

Is the yen a safe-haven currency?

The JPY has been established as a powerhouse global currency for decades, stemming from a major economic rebuild in the wake of the Second World War. As the third most-traded currency in the world, it is extremely liquid and the country's strong political system means that many traders turn to it as a safe-haven currency.

The country also boasts a significant number of assets in foreign markets. This means that, in challenging or difficult financial circumstances, investors are able to offload these and reinvest the capital into concerns that strengthen the yen.

Is the Euro a safe-haven currency?

The debate about whether the Euro is a safe-haven currency continues to rage on. It certainly displays some of the typical characteristics in that it is highly liquid - the second most-traded currency on the planet, according to data from the Bank for International Settlements.

But there are other factors at play which place its status into doubt. In July 2020, a €750 billion fund agreed by EU leaders provided a degree of stability. However, political issues plus the poor economic performance of some of the EU's member nations means that there remains a prominent school of thought that the Euro cannot yet be considered a safe-haven currency in the same way as the USD, CHF or JPY.

Safe-haven currency trading strategies

There are several different approaches you can take when it comes to safe-haven currencies. It's important to remember that none of them can guarantee success, so you need to decide on those which best suit your portfolio and your objectives. Below are a few examples of some common strategies that traders employ.

Day trading

This is where you open and close a position in a market within the same session. One of the advantages of day trading is that it carries limited risk, because the short timeframes mean that any movements - even if they go against you - should not be so significant that you incur huge losses.

Trend trading

One of the most popular forex strategies, trend trading requires you to identify movements in the market through lots of research and technical analysis. It tends to be a longer-term approach that requires plenty of patience and the careful selection of entry and exit points.

Range trading

Another option is to use range tradingrange trading. This is where you predict the movements of a safe-haven currency within certain limits. It's a strategy which is particularly suited to stable economies and those currencies which are not as susceptible to huge movements in price, even in reaction to major news and events.

Hedging using CFDs

It can be a prudent strategy to hedge your portfolio using CFDs. A contract for difference means that you do not own the underlying asset but are merely speculating on its future performance. Even when trading in safe-haven currencies, it can be important to limit your exposure by creating a safety net in the event that the market does move against you.

The advantages of trading safe-haven currencies

The primary benefit of trading a safe-haven currency is that it can provide a degree of stability when the markets are experiencing a downturn - so, although you may incur losses on your assets in other areas, currencies such as the USD, JPY and CHF may still represent opportunities for making a profit. Not only that, but their high liquidity and permanence of demand mean that you should always be in a position to be able to invest in a single currency or trade in safe-haven forex pairs.

What you need to know before trading safe-haven currencies

Any trading strategy or vehicle comes with inherent risks attached. There is no guaranteed path to success, so it's crucial to understand the potential pitfalls and how you can mitigate against those threats.

For example, when trading a safe-haven currency, the opportunities to make larger profits over a shorter period are likely to be reduced due to its lack of volatility. Traders can also fall into the trap of believing that a currency is a safe haven due to its ability to retain its value. But this is not always the case, and the factors that typically characterise a safe-haven currency can change.

The Swiss National Bank has raised its policy interest rate by 0.75% - a move which some predict could see the CHF usurp the USD as the world's primary safe-haven currency. It's vital for traders to be aware of these developments so that they can adapt their strategies accordingly.

How to trade safe-haven forex pairs with FXCM

FXCM is a leading forex broker that can give you access to a number of safe-haven currencies and forex pairs. If you're new to the markets and you want to give yourself time to hone your strategy, you can always try our demo account and build up your experience without exposing yourself to risk.

And when you do decide that the time is right to venture into the markets for real, you can use our flagship Trading Station platform or MetaTrader 4.

With FXCM, you can trade safe-haven forex pairs 24/5, so and explore the possibilities today.

FXCM Research Team

FXCM Research Team consists of a number of FXCM's Market and Product Specialists.

Articles published by FXCM Research Team generally have numerous contributors and aim to provide general Educational and Informative content on Market News and Products.

FXCM Research Team

FXCM Research Team consists of a number of FXCM's Market and Product Specialists.

Articles published by FXCM Research Team generally have numerous contributors and aim to provide general Educational and Informative content on Market News and Products.

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