- 2024-11-01
- News
New Developments in Safe-Haven Currencies
The safe-haven status of the Swiss Franc is declining, while the Japanese Yen primarily exhibits passive safe-haven characteristics, and the US Dollar demonstrates the most robust performance during risk events. With the continuous advancement of the internationalization of the Renminbi, backed by a strong economic foundation, the Renminbi is expected to become a new safe-haven option for global investors.
Safe-haven currencies typically refer to a class of currencies that maintain relative stability or appreciate significantly when global risk aversion surges due to increased uncertainty in international politics or economic fundamentals. These risk events may include regional conflicts, significant market fluctuations, wars, and economic crises, among other unexpected shocks.
Currently, the three universally recognized safe-haven currencies are the Japanese Yen, Swiss Franc, and US Dollar. Since 2022, following the pandemic of the century and unprecedented large-scale interest rate hikes by global central banks, the financial conditions of traditional safe-haven currencies have changed, revealing some characteristics different from the past. Additionally, during individual risk events, the Renminbi exchange rate has risen against the backdrop of a decline in global major currencies, sparking discussions on "Renminbi as a haven" in the market.
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The "passive" safe-haven characteristics of the Japanese Yen
In 2022, as major central banks around the world began to tighten monetary policy by raising interest rates, Japan persisted with ultra-loose monetary policy, becoming the only country with negative interest rates globally (until March 2024). This low-interest-rate environment further reinforced the financing attributes of the Yen. In carry trade transactions, investors can borrow low-interest Yen assets at a relatively low cost to purchase high-yield assets, earning the interest rate differential. When risk events occur, a significant pullback in the prices of high-yield assets, once triggering panic selling, will drive a rapid appreciation of the Yen through the negative feedback of carry trade unwinding. Therefore, although over an extended period, the Yen has depreciated against the US Dollar by nearly 30% since 2022, its safe-haven response can still be observed at certain specific moments. Rather than being an active safe-haven choice for investors, it is more of an inevitable result of the inverse movement between the Yen and risk assets driven by carry trade transactions.
It is precisely because carry trade transactions significantly amplify the fluctuations of the Yen that this "passive" change makes the safe-haven attributes of the Yen more prominent. A typical fact is that under Japan's fully convertible system, domestic investors have a massive scale of overseas assets, mainly financial assets, hence the synchronization between the Yen exchange rate and the changes in the NASDAQ index has noticeably increased this year. It is foreseeable that if the Bank of Japan makes unexpected policy adjustments in the future, a sudden change in financial conditions could even reverse the bull market in US stocks.
The safe-haven attributes of the Swiss Franc are being challenged
As a traditional safe-haven currency, the Swiss Franc's most recognized support comes from Switzerland's neutral status and its advanced financial industry. Since becoming the world's first neutral nation in 1815, Switzerland has been spared from both World Wars and emerged unscathed during the Cold War. With a stable geopolitical environment, Switzerland has gradually developed a sophisticated financial industry and established a unique bank secrecy system, becoming a "safe haven" for global wealth. Under the banner of "property safety," the Swiss Franc has also become a trusted safe-haven currency for investors.
This phenomenon may not be coincidental. The S&P 500 Volatility Index (VIX) can be used to measure the magnitude of risk aversion. When risk events occur, market risk aversion rises, and the VIX index correspondingly increases; conversely, the VIX index decreases. We selected 12 key moments since 2022 when the VIX index showed a sharp peak, representing a rapid increase in risk aversion. Among them, only three times did the Swiss Franc appreciate within 10 trading days after the risk event, and most of the time, it fluctuated significantly, indicating that the safe-haven currency status of the Swiss Franc may be shaken. In response, the Swiss National Bank has repeatedly stated that it would actively take measures to prevent excessive appreciation of the Swiss Franc through market intervention, to maintain its international competitiveness, also becoming one of the central banks in the G7 that raises interest rates later and lowers them earlier.
The US Dollar is the most stable safe-haven currency
As the world's largest reserve, transaction, and settlement currency, the US Dollar has always had a relatively solid international currency status. We have reviewed several historically representative risk events, whether it was the "9/11" terrorist attack related to the United States, the 2008 financial crisis, Sino-American trade frictions, or events outside the United States such as the Japanese earthquake and the Paris terrorist attack, the US Dollar Index did not show a significant upward trend, but the downward trend was also relatively limited. Therefore, the absolute advantage of the US fundamentals has always provided strong support for the stability of the US Dollar value, which exactly conforms to the characteristics of a safe-haven currency.
Similarly, using the 12 risk events since 2022 as an observation window, the US Dollar Index, although not as quick to react to risk events as the Japanese Yen and Swiss Franc, overall, its currency performance is the most stable. Further calculations of the correlation coefficients between different currencies and VIX from 2022 to the present show that the correlation between the US Dollar and VIX is almost close to 0, once again verifying the stable performance of the US Dollar Index. This may be because the US Dollar Index is composed of six currencies and cannot fully represent the changes in the US Dollar itself, so it naturally has a certain smoothing effect. However, from its actual performance, the US Dollar is still a more ideal safe-haven currency than the Japanese Yen and Swiss Franc.
Can the Renminbi become a new safe-haven currency?
According to traditional theory, the core element of becoming a safe-haven currency is the free flow of capital and the free-floating of exchange rates. From this perspective, the Renminbi seems to still have a certain distance to go to become a safe-haven currency. However, in a series of recent risk events, we have observed that overseas investors have increased their holdings of Renminbi assets, especially Renminbi bonds, and correspondingly, the Renminbi has shown a relatively stable trend against a basket of currencies, and even appreciated against the trend. From this, we judge that the safe-haven attributes of the Renminbi are continuously strengthening.
Similar to the US Dollar, the path to becoming a safe-haven currency for the Renminbi may be more inclined toward currency stability. The 2023 Central Financial Work Conference proposed "six strengths," with the foremost being "a strong currency," just as the central bank has emphasized many times, it is necessary to maintain the basic stability of the Renminbi exchange rate at a reasonable and balanced level. Looking ahead, with the continuous advancement of the internationalization process of the Renminbi, backed by a strong economic foundation and the safety of the investment environment, the Renminbi is expected to become a new safe-haven option for global investors.
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