(Created page with " __TOC__ ='''Safe Haven Flows'''= =='''What is a Safe Haven?'''== Previously we learned about what a risk off environment is. Safe haven currencies and safe haven flows are very similar to that of a risk off environment. The major differences are the assets that move and the degree to which they move. A safe haven flow will tend to move much more than a risk off sentiment. It is still risk off, but it’s more like risk off plus [https://volatility.red/Tra...") |
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A safe haven is a type of investment that is expected to retain or increase in value during times of market turbulence or risk off trading. Investors and traders look to move money into safe haven products in order to limit their exposure to losses in the event of market downturns. However, what assets are actually deemed as safe havens can vary depending on the specific nature of the down market and how fast prices are moving. | |||
In this Wiki, we will explore What a Safe Haven is, Why Safe Havens Exist, and some of the more traditional assets that have acted as safe havens in the past. | |||
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=='''What is a Safe Haven?'''== | =='''What is a Safe Haven?'''== | ||
Previously we learned about what a risk off environment is. Safe haven currencies and safe haven flows are very similar to that of a risk off environment. The major differences are the assets that move and the degree to which they move. A safe haven flow will tend to move much more than a risk off sentiment. It is still risk off, but it’s more like risk off plus [ | Previously we learned about what a risk off environment is. Safe haven currencies and safe haven flows are very similar to that of a risk off environment. The major differences are the assets that move and the degree to which they move. A safe haven flow will tend to move much more than a risk off sentiment. It is still risk off, but it’s more like risk off plus [[Trading_psychology | extreme panic]]. | ||
A safe haven is any asset class or investment that the market would expect to hold its value, or potentially increase in value, when there is something that is causing a major [ | A safe haven is any asset class or investment that the market would expect to hold its value, or potentially increase in value, when there is something that is causing a major [[Trading_psychology | fear or concern]] to filter through the markets. | ||
The [ | The [[Price_Action_Analysis | prices]] of safe haven assets will move a lot if there is a very real reason for something to cause [[Trading_psychology | fear or panic]] in the market. A major geo-political event such as a war breaking out can quite easily cause safe haven flows as investors dump any [[Risk | risky]] investments and flock for safety. [[/Price_Action_Analysis | Prices]] can tend to extend much further than would seem rational. | ||
As we just touched on the fact that a safe haven flow occurs when the market is [ | As we just touched on the fact that a safe haven flow occurs when the market is [[Trading_psychology | worried or concerned]] enough to move its capital away from [[Currency | currencies]] that are perceived as [[Risk | risky]] and into [[Currency | currencies]] perceived as safe. There are several [[Currency | currencies]] that are generally viewed as safe havens during these times and to varying degrees. These [[Currency | currencies]] will typically increase in value during these times of safe haven flows. | ||
A safe haven is a [ | A safe haven is a [[currency]] or investment that is expected to retain its value or even increase its value in times of market turbulence. Safe havens are sought after by investors to limit their exposure to losses in the event of market downturns. However, what are considered to be safe havens alter over time as market conditions change, and what appears to be a safe investment in one down market could be a disastrous investment in another down market. This is something that staying in tune with the markets will help you with. | ||
To be a safe haven the general principle is that it has to be a [[currency]] backed by a country that is stable with a secure economy that has a reasonable debt level. | To be a safe haven the general principle is that it has to be a [[currency]] backed by a country that is stable with a secure economy that has a reasonable debt level. | ||
For a safe haven flow to be considered active there needs to be something [ | For a safe haven flow to be considered active there needs to be something [[Trading_psychology | worrying]] investors and traders that is active in the news but is also being reported heavily in other financial news outlets as well. To go with this there must also be a firm reaction in the [[Price_Action_Analysis | prices]] of [[Currency | currencies]]. | ||
For example, if a war breaks out between Russia and Ukraine and threatens to drag Europe and the US into it then the markets may react by moving the markets significantly in the immediate aftermath of discovering this information. In this case we have a solid safe haven flow situation that could continue through to the next trading sessions. | For example, if a war breaks out between Russia and Ukraine and threatens to drag Europe and the US into it then the markets may react by moving the markets significantly in the immediate aftermath of discovering this information. In this case we have a solid safe haven flow situation that could continue through to the next trading sessions. | ||
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On the other hand, if there is some conflict reported but the markets don’t really react to this information then we can say that this is not something that concerns investors very much and is not likely to cause a safe haven flow. | On the other hand, if there is some conflict reported but the markets don’t really react to this information then we can say that this is not something that concerns investors very much and is not likely to cause a safe haven flow. | ||
Often, traders will get caught out by trying to interpret something as a big [ | Often, traders will get caught out by trying to interpret something as a big [[Economic_data_releases | event]] but the actual market doesn’t seem to care very much about it. Understanding what will move the market heavily can take some time and experience actually living through many [[Economic_data_releases | risk events]] and seeing how the market reacts to different types of information over time. | ||
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Most of the time, for many financial companies, it’s not as simple to just move all their money into cash and step away from the uncertain times. In fact, most of the large asset management firms have a legal mandate to be close to fully invested at all times. This is because they have made that promise in writing to their clients in a document that is often referred to as a prospectus. | Most of the time, for many financial companies, it’s not as simple to just move all their money into cash and step away from the uncertain times. In fact, most of the large asset management firms have a legal mandate to be close to fully invested at all times. This is because they have made that promise in writing to their clients in a document that is often referred to as a prospectus. | ||
These companies are legally required to submit this prospectus to the regulators or monetary authorities that oversee their particular capital market. This means that they need to move from one asset class to another rather than straight into cash. And because so many companies are required to do this then they all tend to flock to the same sort of investments when there is [ | These companies are legally required to submit this prospectus to the regulators or monetary authorities that oversee their particular capital market. This means that they need to move from one asset class to another rather than straight into cash. And because so many companies are required to do this then they all tend to flock to the same sort of investments when there is [[Trading_psychology | fear]] in the market. | ||
There is also a level of [ | There is also a level of [[Speculating | speculation]] to safe haven flows. If you think about it; if you knew that a particular asset class or [[currency]] tends to appreciate when the [[Trading_psychology | market gets scared]] then why wouldn’t you look to make a profit AND protect your money at the same time? This [[Speculating | speculation]] can add even more fuel to a safe have flow. | ||
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The USD is one of the key safe haven currencies. This is because of its status as the world’s superpower and also because it is the world's reserve [[currency]]. It’s the world’s most liquid and widely used [[currency]] with a strong political system and typically leads the world during the good times with a robust economy. | The USD is one of the key safe haven currencies. This is because of its status as the world’s superpower and also because it is the world's reserve [[currency]]. It’s the world’s most liquid and widely used [[currency]] with a strong political system and typically leads the world during the good times with a robust economy. | ||
The U.S. economy has a habit of bouncing back from any large-scale recession because they are a global leader in innovation and creative thinking. When there is a financial crisis the [ | The U.S. economy has a habit of bouncing back from any large-scale recession because they are a global leader in innovation and creative thinking. When there is a financial crisis the [[US_dollar | U.S. dollar]] becomes the primary safe haven [[currency]] because it is widely considered that the U.S. will not default on its debt making the [[US_dollar | U.S. dollar]] valuable when investors are scared about the global economic situation and the prospects of other countries. | ||
The one problem facing the [ | The one problem facing the [[US_dollar | U.S. dollar]] as a safe haven is its massive debt burden. This has the potential to cause the U.S. some financial problems if all of its debts were ever called in at the same time. Because of this, the USD is generally the least attractive safe haven [[currency]] in the markets for shorter-term safe haven flows but in major global recessions, such as the financial crisis of 2008-2009, the USD has shown that it will appreciate over longer-term safe haven flows. | ||
=='''The Swiss Franc'''== | =='''The Swiss Franc'''== | ||
This is an extremely attractive [[currency]] during times of turmoil because it’s backed by a country that has a stable economy, a low [ | This is an extremely attractive [[currency]] during times of turmoil because it’s backed by a country that has a stable economy, a low [[Economic_data_releases#Gross_Domestic_Product | debt-to-GDP ratio]], and a long history of political neutrality on the world stage. In fact, the [[currency]] is so attractive that the [[Central_banks#Switzerland_%E2%80%93_Swiss_National_Bank_(SNB) | Swiss National Bank (SNB)]] is known for constantly trying to intervene and weaken the Swiss Franc in order to stop its high value from hurting its exporters and causing [[Fundamental_Analysis#Inflation_and_Deflation | deflation]] within the economy. | ||
Because of an active [ | Because of an active [[Central_banks | central bank]] trying to deter investors, this is usually only bought in large volumes during particularly worrying events that have the potential to last in the longer term. Generally speaking, the Swiss Franc is safe, stable, and popular with traders in times of trouble which can provide us with some interesting [[trading]] opportunities. | ||
The one problem with the Swiss Franc as a safe haven [[currency]] is that the [ | The one problem with the Swiss Franc as a safe haven [[currency]] is that the [[Central_banks | central bank]] takes an active role in deterring people from buying its [[currency]]. For years the SNB held a [[Price_Action_Analysis | price]] floor with the EURCHF [[currency]] pair and will manipulate the [[Price_Action_Analysis | price]] of their [[currency]] at any time without warning. Interestingly enough, at the time of this writing, the SNB actually has a negative [[Central_banks#Interest_Rates | rate of interest]] which means that investors have to pay to own Swiss Francs. However, in times of mass panic investors have shown that they would pay a negative [[Central_banks#Interest_Rates | rate]] in order to keep their capital safe. | ||
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This is an interesting safe haven [[currency]] because, while it does have a stable political system and the [[currency]] itself is very liquid and highly traded, its economic situation does not share the same optimistic outlook of its safe haven counterparts. | This is an interesting safe haven [[currency]] because, while it does have a stable political system and the [[currency]] itself is very liquid and highly traded, its economic situation does not share the same optimistic outlook of its safe haven counterparts. | ||
Japan has long struggled for decades to generate any significant economic growth and its [ | Japan has long struggled for decades to generate any significant economic growth and its [[Economic_data_releases#Gross_Domestic_Product | debt-to-GDP]] ratio is off the charts being one of the highest in the entire world. Normally this would be enough to deter investors from placing any money into that economy. However, Japan is also one of the largest creditors in the world owning foreign assets that are comparable in value to the massive debt levels they have on the books. | ||
The other curious thing about the Japanese situation is that almost all of their debt is held internally by the people and businesses of Japan. This means that if the debt holders called in the debt to be repaid then they would effectively be pulling the ceiling down on their own house. It is highly unlikely that the people of Japan would knowingly collapse their own economy which gives investors confidence in the Japanese Yen when there is something short-term to be worried about. | The other curious thing about the Japanese situation is that almost all of their debt is held internally by the people and businesses of Japan. This means that if the debt holders called in the debt to be repaid then they would effectively be pulling the ceiling down on their own house. It is highly unlikely that the people of Japan would knowingly collapse their own economy which gives investors confidence in the Japanese Yen when there is something short-term to be worried about. | ||
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These elements combined actually make Japan fairly attractive and mean that any collapse is highly unlikely even with their outrageous debt ratios. This is why the Yen tends to be the go-to [[currency]] in times of safe haven flows and market panic right away. | These elements combined actually make Japan fairly attractive and mean that any collapse is highly unlikely even with their outrageous debt ratios. This is why the Yen tends to be the go-to [[currency]] in times of safe haven flows and market panic right away. | ||
When you are [ | When you are [[trading]] the Yen you must be very aware that when something happens in the [[Economic_data_releases | news]] it can and will react violently and almost immediately as everyone plows all of their money into the Japanese Yen. This is an especially stark warning if you are selling Yen at that time. It is not uncommon for the Yen to rally many times its normal average daily range in one session so you need to remove your biases about how far is too far for the [[Price_Action_Analysis | price]] to go because the market won’t care about that and will continue to buy Yen as long as the fear remains strong enough. | ||
What else can drive sentiment during a trading session? Well, there are many things that can drive sentiment and we will spend some time now looking at some of the more minor things that can move [[Price_Action_Analysis | prices]] in the short term. | |||
==Related Wikis== | |||
Readers of '''Safe Haven Flows''' also viewed: | |||
* [[Sentiment Analysis]] | |||
* [[The Bank of Japan]] | |||
* [[Forex]] | |||
* [[US dollar]] | |||
* [[Economic data releases]] | |||
Latest revision as of 20:29, 17 October 2023
A safe haven is a type of investment that is expected to retain or increase in value during times of market turbulence or risk off trading. Investors and traders look to move money into safe haven products in order to limit their exposure to losses in the event of market downturns. However, what assets are actually deemed as safe havens can vary depending on the specific nature of the down market and how fast prices are moving.
In this Wiki, we will explore What a Safe Haven is, Why Safe Havens Exist, and some of the more traditional assets that have acted as safe havens in the past.
Safe Haven Flows
What is a Safe Haven?
Previously we learned about what a risk off environment is. Safe haven currencies and safe haven flows are very similar to that of a risk off environment. The major differences are the assets that move and the degree to which they move. A safe haven flow will tend to move much more than a risk off sentiment. It is still risk off, but it’s more like risk off plus extreme panic.
A safe haven is any asset class or investment that the market would expect to hold its value, or potentially increase in value, when there is something that is causing a major fear or concern to filter through the markets.
The prices of safe haven assets will move a lot if there is a very real reason for something to cause fear or panic in the market. A major geo-political event such as a war breaking out can quite easily cause safe haven flows as investors dump any risky investments and flock for safety. Prices can tend to extend much further than would seem rational.
As we just touched on the fact that a safe haven flow occurs when the market is worried or concerned enough to move its capital away from currencies that are perceived as risky and into currencies perceived as safe. There are several currencies that are generally viewed as safe havens during these times and to varying degrees. These currencies will typically increase in value during these times of safe haven flows.
A safe haven is a currency or investment that is expected to retain its value or even increase its value in times of market turbulence. Safe havens are sought after by investors to limit their exposure to losses in the event of market downturns. However, what are considered to be safe havens alter over time as market conditions change, and what appears to be a safe investment in one down market could be a disastrous investment in another down market. This is something that staying in tune with the markets will help you with.
To be a safe haven the general principle is that it has to be a currency backed by a country that is stable with a secure economy that has a reasonable debt level.
For a safe haven flow to be considered active there needs to be something worrying investors and traders that is active in the news but is also being reported heavily in other financial news outlets as well. To go with this there must also be a firm reaction in the prices of currencies.
For example, if a war breaks out between Russia and Ukraine and threatens to drag Europe and the US into it then the markets may react by moving the markets significantly in the immediate aftermath of discovering this information. In this case we have a solid safe haven flow situation that could continue through to the next trading sessions.
On the other hand, if there is some conflict reported but the markets don’t really react to this information then we can say that this is not something that concerns investors very much and is not likely to cause a safe haven flow.
Often, traders will get caught out by trying to interpret something as a big event but the actual market doesn’t seem to care very much about it. Understanding what will move the market heavily can take some time and experience actually living through many risk events and seeing how the market reacts to different types of information over time.
Why Do Safe Havens Exist?
Safe havens exist simply because large financial and investment companies need a place to protect themselves in times of uncertainty.
Most of the time, for many financial companies, it’s not as simple to just move all their money into cash and step away from the uncertain times. In fact, most of the large asset management firms have a legal mandate to be close to fully invested at all times. This is because they have made that promise in writing to their clients in a document that is often referred to as a prospectus.
These companies are legally required to submit this prospectus to the regulators or monetary authorities that oversee their particular capital market. This means that they need to move from one asset class to another rather than straight into cash. And because so many companies are required to do this then they all tend to flock to the same sort of investments when there is fear in the market.
There is also a level of speculation to safe haven flows. If you think about it; if you knew that a particular asset class or currency tends to appreciate when the market gets scared then why wouldn’t you look to make a profit AND protect your money at the same time? This speculation can add even more fuel to a safe have flow.
The US Dollar
The USD is one of the key safe haven currencies. This is because of its status as the world’s superpower and also because it is the world's reserve currency. It’s the world’s most liquid and widely used currency with a strong political system and typically leads the world during the good times with a robust economy.
The U.S. economy has a habit of bouncing back from any large-scale recession because they are a global leader in innovation and creative thinking. When there is a financial crisis the U.S. dollar becomes the primary safe haven currency because it is widely considered that the U.S. will not default on its debt making the U.S. dollar valuable when investors are scared about the global economic situation and the prospects of other countries.
The one problem facing the U.S. dollar as a safe haven is its massive debt burden. This has the potential to cause the U.S. some financial problems if all of its debts were ever called in at the same time. Because of this, the USD is generally the least attractive safe haven currency in the markets for shorter-term safe haven flows but in major global recessions, such as the financial crisis of 2008-2009, the USD has shown that it will appreciate over longer-term safe haven flows.
The Swiss Franc
This is an extremely attractive currency during times of turmoil because it’s backed by a country that has a stable economy, a low debt-to-GDP ratio, and a long history of political neutrality on the world stage. In fact, the currency is so attractive that the Swiss National Bank (SNB) is known for constantly trying to intervene and weaken the Swiss Franc in order to stop its high value from hurting its exporters and causing deflation within the economy.
Because of an active central bank trying to deter investors, this is usually only bought in large volumes during particularly worrying events that have the potential to last in the longer term. Generally speaking, the Swiss Franc is safe, stable, and popular with traders in times of trouble which can provide us with some interesting trading opportunities.
The one problem with the Swiss Franc as a safe haven currency is that the central bank takes an active role in deterring people from buying its currency. For years the SNB held a price floor with the EURCHF currency pair and will manipulate the price of their currency at any time without warning. Interestingly enough, at the time of this writing, the SNB actually has a negative rate of interest which means that investors have to pay to own Swiss Francs. However, in times of mass panic investors have shown that they would pay a negative rate in order to keep their capital safe.
The Japanese Yen
The Yen tends to get most of the safe haven flows from the market for shorter-term flows.
This is an interesting safe haven currency because, while it does have a stable political system and the currency itself is very liquid and highly traded, its economic situation does not share the same optimistic outlook of its safe haven counterparts.
Japan has long struggled for decades to generate any significant economic growth and its debt-to-GDP ratio is off the charts being one of the highest in the entire world. Normally this would be enough to deter investors from placing any money into that economy. However, Japan is also one of the largest creditors in the world owning foreign assets that are comparable in value to the massive debt levels they have on the books.
The other curious thing about the Japanese situation is that almost all of their debt is held internally by the people and businesses of Japan. This means that if the debt holders called in the debt to be repaid then they would effectively be pulling the ceiling down on their own house. It is highly unlikely that the people of Japan would knowingly collapse their own economy which gives investors confidence in the Japanese Yen when there is something short-term to be worried about.
These elements combined actually make Japan fairly attractive and mean that any collapse is highly unlikely even with their outrageous debt ratios. This is why the Yen tends to be the go-to currency in times of safe haven flows and market panic right away.
When you are trading the Yen you must be very aware that when something happens in the news it can and will react violently and almost immediately as everyone plows all of their money into the Japanese Yen. This is an especially stark warning if you are selling Yen at that time. It is not uncommon for the Yen to rally many times its normal average daily range in one session so you need to remove your biases about how far is too far for the price to go because the market won’t care about that and will continue to buy Yen as long as the fear remains strong enough.
What else can drive sentiment during a trading session? Well, there are many things that can drive sentiment and we will spend some time now looking at some of the more minor things that can move prices in the short term.
Related Wikis
Readers of Safe Haven Flows also viewed: