BNY Mellon: Safe Haven of Choice

March 1, 2019

One of the more interesting themes to have emerged this week is the difficulty of finding the appropriate safe haven instrument when required in the current market environment. 

This issue was particularly apparent on Wednesday and Thursday of this week with the rising tensions in Kashmir, the testimony of Michael Cohen to the House of Representatives Oversight Committee and the break down in the US/North Korean summit all having a negative impact on sentiment (even if only in the short term). It’s therefore worth picking apart the cross-currents to see what the collective wisdom of the market has been.

The past few weeks have seen the notable heightening in tensions between the nuclear powers of India and Pakistan. The logical choice of safe haven in the face of this would normally have been the USD, the JPY and the CHF (gold has a mixed history as a safe haven in this kind of environment).

However, it was noticeable that the USD did not perform well in the immediate aftermath of the news that the Pakistan Armed Forces had bombed several locations along the line of control in Kashmir on Wednesday and that several aircraft had been shot down.

Instead it was the JPY that proved the prime beneficiary of investor nervousness as the news broke.

The USD itself came under pressure from the start of the European morning on Wednesday following the publication of the prepared testimony by Michael Cohen.

While this was a mild sell-off, it was consistent with a broader pattern that has been observable over a number of decades around times of domestic political uncertainty in the US.

While a USD recovery did emerge during the course of the US morning on Wednesday, this seemed more connected to a rebound in US yields that emerged at exactly 8:30 than any re-evaluation of the USD as a safe haven. The subsequent rally in the USD since yesterday in the aftermath of the GDP data was also clearly yield related rather than being driven by any major improvement in sentiment (as highlighted by the only modest recovery in US equity futures)

This pattern was repeated yesterday morning with the USD coming under pressure as the summit meeting between President Donald Trump and Kim Jong-un was brought to an abrupt and unscheduled close

This pattern of the USD coming under pressure when risk sentiment deteriorates was also apparent yesterday morning, with the greenback coming under pressure as the summit meeting between President Donald Trump and Kim Jong-un was brought to an abrupt and unscheduled close.

Given the recent veiled threat from the North Korean leader on what would happen if the US did not lift sanctions, the USD's poor performance was understandable. However, with both the Tokyo and Seoul equity markets taking a sharp hit on the news (along with the KRW) it was also clear that the JPY was unlikely to provide a particularly useful haven either. Indeed, it pretty well tracked the USD’s losses over the course of the European morning yesterday.

If the JPY and USD have failed to hold on to their traditional roles as safe haven currencies this week, then which currency has benefited?

The simple answer is the CHF, gaining ground against both the JPY and USD through Wednesday and on Thursday morning. While the rise in realized volatility on the back of this was modest, it’s also worth noting that this comes after 12 months of increasingly constrained price action.

That might be worth bearing in mind should risk aversion re-emerge over the next few weeks.