Can we still call the Jap Yen a safe haven ? Or the Swissie, for that matter ? And as for Gold ....


ref :- "Fed is a positive factor for US dollar ...." , Interview on Bloomberg TV with Commerzbank's Esther Reichert.

Nothing is carved in stone when it comes to markets ..... things change, and the art is to recognise the change before it gets expensive. Take "safe havens", for example ..... the bolt-holes where investors take cover in times of trouble. Gold has long been the archetypal safe haven in many ways, but you would find it hard to argue that it fits the bill in the modern era. Over the last three months, at a time of highly-elevated geopolitical tensions the price of gold ($1243 per oz.) has fallen by over $100. There are a number of reasons behind gold's fall from safe-haven grace, some of them revolving around such unquantifiable concepts as market psychology. But foremost among them must rank the fact that gold is a non-interest bearing asset at a time when rates in the US particularly are on the way up, and the strength of the US dollar in which gold is traded (which is of course directly related).

So if gold is right out of favour as a safe haven where does the money go when managers get a bit nervy ? Well, top quality sovereign bonds in general and US Treasuries in particular, as evidenced by the flattening US yield curve. Short-term rates are headed higher and many assumed that longer-term yields were bound to go the same way, especially after the 10yr yield broke through 3.00%. It's back down at 2.85%, despite strong growth, rising inflation pressure and an upcoming schedule that will see a heavy increase in bond issuance as the Treasury seeks to finance the administration's tax cuts and infrastructure spending. It's a case of increased supply being met by even more heavily increased demand ..... and much of the rationale behind that demand can be put down to T. Bonds' attraction as a "risk-off" safe haven asset.

So what about currencies ? It's been really all about the dollar in FX markets in recent months, but regardless of the hegemony that the US unit holds in world commerce it hasn't always been viewed as a classic safe-haven currency -- that role has been played by the Swiss Franc and of course the Japanese Yen. There are lots of reasons that can make a currency attractive, but it's worth reminding ourselves what investors specifically look for in a safe haven currency. One might think that positive economic growth and strong finances were prerequisites, but Japan's staggering debt-to-GDP ratio suggests that investors can see beyond that if the finances are at least stable and the country is not suffering problems with inflation.. A positive trade balance is a must, and Japanese investors, in particular, hold a high percentage of foreign assets , the proceeds from which can get repatriated in times of stress. The currency should be easily traded (plenty of liquidity) and backed by a stable political regime. And ultra-low interest rate currencies that fund "carry trades" (like the Yen and Sw. Franc) benefit from those trades being reversed as investors bail out of riskier, higher-yielding currencies that suffer in times of trouble (like those in emerging markets).

And yet ..... USD / JPY has climbed from a low of JY104.73 on 23rd March to trade at 112.48 as we write -- that represents a fall in the value of the Yen versus the Dollar of over 7%. USD / CHF has climbed from .9225 centimes to the Dollar on 15th Feb to .9944 right now, also over 7%. Plainly, either the rules have changed and the Dollar is the only remaining safe haven currency, or FX markets are being driven by other fundamentals despite the current, truly awful geopolitical background.

And that was really Ms Reichert's point this morning ..... yes, the US Dollar must be treated as a safe haven these days despite the US's enormous trade deficits. It's those deficits that have prompted Mr Trump's ignition of a trade war of course, but it's not any particular expectation that he'll be successful in addressing those deficits (by "winning" that war) that has made the Dollar the currency in demand. It's much more to do with another of the most basic fundamentals of FX trading -- interest rate differentials. The US has just posted very strong consumer spending data that is expected to see 2nd quarter annualised GDP growth come in at at least 4%. Inflation numbers are currently above target, and continued rate rises are inevitable at a time when most other economies are still some way off a normalization of rate policy.

Fed Chairman Powell speaks to both the Senate and the House of Representatives finance committees today and tomorrow. Investors will be wanting to glean a number of things from his testimonies : how tolerant will the Fed be about above-target inflation ? What's the Fed's view of the likely effects of a trade war on US economic performance ? Under what circumstances would the Fed consider a more hawkish path of rate rises rather than the current gradual approach ?

Mr Powell will have to box clever ..... the President is doing a pretty good job of destroying the coordinated global growth story that has informed Fed decisions of the past and he has made things much more difficult to predict further down the line. But right now FX markets are concentrating on the US growth story, and it's that that has brought such support for the US currency. Traditional safe haven thinking ranks so far below the US growth/interest rate story that it has formed little or no part of currency trading in recent months, and may not do so for some time yet. But it'll come round again ...... sooner or later.

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