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JPY CHF safe Haven Currencies
Just getting back to a question from Rolando, exactly why the Japanese yen and the Swiss franc is considered as safe-haven currencies? Now, first of all, thanks for the question, Rolando. Let’s start with the Swiss Franc.RE
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Now, the Swiss franc has remained a very attractive safe-haven currency, especially during times of market turmoil, mainly due to the stability of the Swiss government, as well as the very stable banking and financial system in Switzerland, which is basically world-renowned.
The economy has a very low dept to GDP ratio. It also has a current account surplus, and it has largely maintained political neutrality, which means that is is often unmoved by many of the foreign affairs, compared to some of the other developed economies.
The currency’s attractiveness was one of the main reasons why the SMB is known to intervene in the currency markets, and trying to weaken the currency, to try and stop the appreciation from hurting the competitiveness of Swiss exports.
Now, turning to Japan, the country also has a current account surplus, just like Switzerland, which means that it exports more then it imports, but the economy is not one that one would normally consider as being a safe-haven, as the country has a very high level of debt, basically sitting at almost 250% of GDP, and has been struggling with low inflation for the last couple of decades.
Now, what makes Japan’s debt very different then other developed economies, is that most of their debt is held internally. Now that means that Japan is basically the world’s biggest creditor nation, meaning that it owns a lot more foreign assets then what it owes.
There’s also some other reasons why the Japanese yen and the Swiss franc often appreciate during risk of flows, and that has to deal with the very low interest rates from both currencies. So Switzerland is sitting at -0.75% interest rate, and Japan is sitting at -0.1%. With the low interest rates, these currencies are often used as funding currencies for something like carry trades.
This means that investors will borrow Japanese yen and Swiss francs to buy other higher risk and higher yielding currencies, like the Aussie, the CAD, the Kiwi, and even emerging market currencies, like the Mexican peso, the Russian ruble, the South African ZAR, et cetera.
Thus, when the market turmoil hits, and market participants start to basically offload those carry trades, you’ll often see a very big repatriation of Japanese yen and Swiss francs, basically flowing in, and a lot of outflows in your high beta currencies, like your EM currencies, as well as your more classic high betas, like your Aussie, your Kiwi, and your CAD.
So that is some of the main reasons why the Swiss franc and the Japanese yen is considered safe-havens, and in terms of the attractiveness as funding currencies, why we often see them appreciate during times of risk-off, and depreciate during times of risk-on.