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What is a safe-haven (currency)?

‘Flight to safety’ and natty little phrases like it are bandied around frequently as a useful way of deflecting a question and as a means of not having to justify, at least at any micro level, what has caused a currency to move in the particular direction.

Remember that FX dealers generally have no formal qualifications or qualified regulatory oversight when it comes to whats in their heads. They are not chartered analysts and do not hold diplomas that grant them any authority when it comes to assessing or commenting on market movements. Yes, an FX broker can advise you on the best contract to use to achieve your objectives, but they are no better placed than you to answer questions about where a rate of exchange may or may not move to.

For that reason terms like ‘safe haven’, ‘risk aversion’ and ‘window dressing’ are excellent foils by which a dealer might, when questioned, appear more insightful that they are. It sounds so very cynical, but, that doesn’t make it false. Without much understanding of the broader concept, dealers use these phrases and others as a form of conversational padding. In the same way that using acronyms suggests one knows one’s onions, these broad terms in relation to the market are, if unchallenged, designed to put a distance between the dealers understanding and that of their client, even though it is more than likely that no such distance exists. So it is with the term ‘safe haven’.

In a purely investmenty sense a safe haven is an investment that is expected to remain stable even at a time of particular volatility elsewhere in the market(s).

It is worth noting though that safe haven is a relative notion. What is stable at worst and appreciating at best in one trading environment, may well be one’s undoing if the winds of sentiment change. It is not a sedentary vehicle per say, but it is a go-to and consistent instrument depending on the market conditions. If an entire economic sector is performing poorly but one company within that sector is performing well, its stock could be considered a safe haven.

A 'safe haven currency' is by definition a currency which investors want to buy into and hold during periods of economic and political uncertainty.

Gold is typically considered a safe haven asset when currency markets are volatile. United States Treasury Bills are also considered a safe haven even in a tumultuous economic climate because they are backed by the full faith and credit of the U.S. government. In the FX market, the Swiss franc is considered a safe haven currency.

Liquidity is also a key issue when it comes to identifying a safe haven because you want to be able to buy and sell the currency with ease. This is arguably why USD is so appealing too. Holding US dollar gives you access to a supremely broad array of other assets by virtue of its status as the global reserve currency; it is in demand the world over and can be used the world over to boot. Consider, if you will, it's appreciation following the global credit crunch and market shock in 2008. GBP/USD was trading at 2 to 1 for quite some time prior to 2008 and throughout the United States’s middle eastern military engagements. Come 2016 USD trades at 1.50-/+ vs the pound even though that military deployment continues. The notion of war in this context has not actually dampened demand for the dollar because it is so widely used, if not prized, globally.

Liquidity is an expression of the ease with which an asset or a currency can be moved, bought or sold. A ‘liquid’ asset is one that can be speedily exchanged and/or traded. There is demand and supply to such an extent that the owner of the asset can sell it easily if needs be. An 'illiquid' asset or currency is one with limited demand and supply. There is only a small market in which such an asset can be bought and sold; the term 'market' in this context should be imagined in the way that the word implies…literally a place to buy and sell goods, assets and services.

The liquidity inherent to the US dollar affords countries with limited market access the ability to buy and sell things quickly and easily. These countries genuinely prize the dollar precisely because it affords them the freedom to engage with other global entities, whether corporate or sovereign.

So, a safe haven currency is a predictable one. It is one with a stable government and somewhat predictable values. A growing and diversified economy is also characteristic of a safe haven currency. It is that diversification which gives the currency stability during times that might prove volatile for other currencies whose domestic economies are more singularly weighted.

Whilst the vast majority of Prime Cap's clients need to convert and transmit a currency for a particular purpose, to pay for something or to move the currency back into the territory of their ongoing business/trading expenses, some private clients do not need to move or spend their currency and so elect to hold their money in currencies that have a lazier relationship with the wider global economy.

We recently had a client who lived in Hong Kong. He moved back to the UK for work, but, has personal and

family interests in Europe. Hence, the currencies on his radar were and are Hong Kong Dollar (HKD), GBP sterling and EUR euro. Our client had no immediate use for sterling. He was considering selling his HKD in to EUR in order to capitalise on what he thought might be a rise in the value of EUR denominate property in certain european cities whilst the UK negotiated is extraction from the EU. Given the strength of the US dollar and its tied/pegged relationship with the Hong Kong Dollar our client felt he had further incentive to sell HKD (notionally USD) into EUR because EUR was weak.

Whilst Prime Cap's traders will never ever attempt to call the market, we do have opinions and are in a position to present commentary on the relative state of one currency against another and one economy against another. We identified that sterling was in fact weaker vs HKD than EUR. Brexit negotiations means the GBP could in fact weaken further in the near term which would advantage our client. Furthermore, should the UK emerge more attractive as a result of said negotiations...and, let's face it, the only way for GBP was up in the longer term, then the client could benefit for a stronger position against EUR. Yes, he might miss a gap in the Parisian property sector...a gap he thought he could take advantage of because individuals, investors and institutions were troubleshooting the outcome of Brexit...however, GBP was still weak against those he thought might rally property prices were struggling to liquidate their GBP denominated assets, meaning he hadn't necessarily missed the crest of a wave as yet.

It is also worth looking at the yield our client could expect were he to park his HKD in sterling or EUR. With interest rates supposedly due to rise in the UK (which in turn would bolster the value of the pound) it seemed likely he would get a more favourable savings return from GBP denominated instruments than he would from those of the Eurozone.

Sterling is a safe haven despite political and economic uncertainty. An asset manager might have advised our client to do something all together different with his funds. Prime Cap's role is not to advise our client as to what instrument or vehicle might improve their wealth, however, we have partners who do this. Anyway, the overriding concern of our client was that whilst things were up in the air he wanted access to his funds. His assets needed to remain liquid. Many of the indicators we look at suggested that taking advantage of HKD's strength against the pound would achieve the desired liquidity and also leave him well place to operate in a rising market. Like so many in his position, particularly in the private equity space, our client is keeping his 'powder dry'. He is biding his time before popping his money into the longest term vehicle and he is choosing to use sterling as the waiting room precisely because it is a stable, in demand, liquid 'safe haven'.

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