USD - the safe haven of last resort…. at least for now

FX Strategy Articles > Fundamental articles

So it’s 2012 and a new year but it also feels a lot like late 2008 déjà vu! The markets were hanging on every word out of the multiple meetings in Europe in the lead up to Christmas hoping for some sort of resolution – then there was a brief reprieve over the festive season and then back to the daily up and down volatility throughout the beginning of January.

Since toping on April 29 2011 the EUR/USD has fallen steadily at investors have moved into the safety of the USD. One factor which has continued to add momentum to the USD safe haven status has been the speed at which other contender nations have acted to repel investors inflating their currencies. For example both the Bank of Japan and the Swiss National Bank have taken actions in recent times to weaken their currencies. As regular FX Strategy readers will understand national governments don’t take to kindly to massive inflows of demand for their currencies which drive up their exchange rate and making their nations less competitive. Reserve Bank actions such as these have dramatic effects. For example the day after the Bank of Japan’s intervention, the Yen fell 5%!

It is a risky stance for a nation to take however. The world of forex is just enormous – approximately US 4 trillion dollars is traded each day. Probably no nation – not even the USA - is large enough to fend off a truly spirited attack on its currency – as the Bank of England found out ever so famously!!

What this means for FX Strategy readers is that while we find ourselves back in a paradigm where the USD is reigning supreme and where there is perhaps a short term trade to be made on the EUR:USD,  readers may find more lucrative and compelling FX trades by seeking out the other potential safe haven currencies that have been pushed out of the spotlight.

Here at FX Strategy HQ we are currently focusing our research and analysis on currencies including the Norwegian Krone, Canadian Dollar (Ed. Note: nickname for CAD = the “loonie”. Makes us smile every time), Japanese Yen and Swiss Franc. As a side note – an important aspect to safe haven status is liquidity – and this is something which the Krone lacks. So when you are strategising about a potential safe haven currency, don’t forget to factor in its liquidity amongst all the other important considerations such as stable government, debt levels, commodity backed or economic backed and potential government interventions.

The USD may continue to hold the mantle of safe haven for now at least and may well for the better part of 2012 however as we gaze out into the murky future we are less sure that the USD will always be “of last resort”. For these reasons we are on the front foot at identifying currencies and FX trades that could outperform in the future.

By Friday Fundamentalist, Published on 14th of January 2012
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