With both the EUR and the USD buckling under the weight of their respective debt crises, traders and investors are searching for a new safe haven.
Gold has been doing very well, hitting record high after record high. The Swissie has also been faring well, with the USD/CHF hitting another record low in late July.
However, with the USD, a traditional safe haven in volatile markets, plummeting, where else can traders turn?
The most recent forex trend has been the emergence of commodity currencies as safe havens, in particularly the commodity dollars.
Commodity currencies are currencies from countries whose economies depend heavily on commodity exports. Such currencies include the Australian, Canadian and New Zealand dollars, the Norwegian krone, South African rand, Brazilian real, Chilean peso, Indonesian rupiah and Russian rouble.
Of these, the most frequently traded currencies are the Australian and Canadian dollars. The sovereign bonds of both economies have held their AAA ratings (whilst the AAA rating of the US may come under review) and both economies’ banking sectors avoided the worst of the financial crisis.
The AUD has recently been trading at 29 year highs against the USD; or at its highest levels since it was first floated freely in 1983; having gained 40% on the USD in the last decade. Much of this is due to the growth of China and its demand for commodities, on which commodity prices have risen and fuelled the Australian economy. Although it has dropped following the debt-ceiling announcement and manufacturing concerns, it is unlikely to fall below its July 19 low of 1.0598.
Meanwhile the CAD reached its highest level since November 2007 in late July with the USD/CAD at 0.9406. Both higher oil prices and economic stability are responsible, with Canada’s government working to eliminate the country’s deficit by 2013.
Recent USD weakness has also given the currencies a boost – first because they are both measured against the USD, and second because commodity prices are denominated in US dollars, meaning that as the USD falls, commodity currencies rise.
Typically, commodity currencies have suffered in skittish markets – a weak global economy generally results in weaker commodity prices, negatively impacting commodity currencies. Traders also withdraw their investments in commodity currencies, turning to traditional safe havens (the CHF, gold and the USD).
However, the present global economy is doing very badly. In the eurozone, as soon as one ailing economy is given a bailout, another one emerges, and there are several that ready to take Greece’s place. There is growing speculation about the booming Chinese economy bursting, with the investment boom accounting for almost 70% of its GDP, or twice the level Japan reached during the height of its industrialisation. And the recent scare about the US missing the debt-ceiling extension deadline may have passed, but the possibility of a government downgrade remains a possibility.
Clearly the USD cannot be considered a safe haven going forward, and the market has been turning to the AUD and CAD.
A safe haven currency should be relatively isolated from global events. This is typically not the case with commodity currencies, with the AUD vulnerable to the economy of China, the largest importer of Australian exports, and the CAD vulnerable to issues in the Middle East, and subsequent oil-price fluctuations.
However, lately both the AUD and CAD have rallied in response to global economic turmoil. Both currencies have dissociated themselves from the influence of the EUR and USD – although the AUD dropped following Obama’s announcement that the US government had reached an agreement about avoiding a default, it only fell to 1.1028. The currencies’ strengths or weaknesses are being increasingly determined by local factors, and are increasingly moving towards the isolation desired in a safe haven currency.
According to the International Monetary Fund, the share of global currency reserves including the CAD and USD now exceeds that held in JPY and GBP, with Asian central banks very keen to buy alternative currencies.
The CHF and gold are unlikely to stop being safe havens any time soon; however, the CAD and AUD may be set to join them in the short- to mid-term. Economists are predicting that both will reach new highs against the US dollar, the 1.10 for the CAD and 1.12 for the AUD, implying that the forex market is unlikely to go short just yet.
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- Forex features – safe haven currencies (talkingforex.wordpress.com)
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