EUR or USD: Which is the better safe haven? – Rabobank

Jane Foley, Senior FX Strategist at Rabobank, suggests that given the potential for the current crisis between N.Korea and the US to extend, it may be useful to discuss which currency acts as a better safe haven while making a particular mention of the USD and the EUR. 

Key Quotes

“We see the CHF as the best safe haven currency.  Switzerland runs a large current account surplus and only a close to flat budget position.  It goes without saying that there is political stability in Switzerland and a strong judiciary.  Crucially, there is also a good level of liquidity in the CHF. This factor suggests that currencies such as the DKK, SEK or NOK can never be true safe-haven despite their strong respective fundamentals.  Although in times of crisis investors lose interest in relative returns, they still need reassurance that they can have quick access to their funds.  Consequently some funds will shun illiquid currencies.”

“To offset the attraction of the hugely overvalued CHF, the SNB has been maintaining an aggressive policy of intervention threats and negative interest rates for a prolonged period.  Although the BoJ remains committed to its aggressive QQE policy, its position within the G7 has prevented the Japanese authorities from threatening to intervene to offset unwanted currency inflows.   As a consequence, many investors may favour the JPY over the CHF as a safe haven in practice.  Measured in the year to date, the JPY has outperformed the CHF by 1.05%, though this could reflect the fact that geopolitical concerns have been concentrated in the Asian region this year.”

“We would characterise the USD’s past relationship with safe haven as flirtatious.  Treasuries remain a choice safe haven asset.  Last week demand for 3yr and 5yr US debt in particular saw the belly of the treasury curve react to increased geopolitical tensions.  However, since this could represent a straight moves from US stocks to US bonds, it is not clear whether there will be always be a USD transaction linked with such a move.  This is particularly possible at present given that the greenback has been out of favour this year and since Europe is not involved in the current crisis.  These factors argue that Bunds may be more favoured than treasuries currently as a safe haven asset.  It can also be argued that on paper the EUR ticks more safe-haven boxes than the USD.”

“US lags the Eurozone and in particular Germany in terms of its currency account position.  Current account surplus countries tend to fare well in crisis on the perception that investors tend to brings funds home.   The US also lags Germany in terms of its budget position.  Despite the fact that on paper the EUR can claims strong safe-haven credentials, the fact that it was in the throes of a debt crisis very recently indicates that it still cannot claim the credibility to make it a true safe haven.  That said, given this year’s rotation back into the EUR and the widespread view the EUR fundamentals have improved this year relative to USD, we would expect the EUR to hold its ground well in the face of current US./N. Korea tensions.  On a 12 mth view we expect EUR/USD at 1.20.”