Are safe haven currencies back in vogue?

Published: Jun 2013

In the weeks leading up to mid-May, the traditional safe haven currencies – the Swiss franc (CHF) and Japanese yen (JPY) – have declined against the euro (EUR) and the US dollar (USD). This movement was unsurprising for those watching the market. While Eurozone tensions are receding and US growth prospects are improving, the extremely low yields on Swiss and Japanese money products have nothing to offer to yield hungry investors. Yet, these safe haven currencies are expected to regain their appeal, particularly against the euro.


With its interest rate cut at the start of May, the European Central Bank (ECB) has begun a monetary easing cycle. Speculation on further rate cuts (including expectation that deposit rates will turn negative) and a predicted rise in Eurozone tensions later this year will cause EUR/CHF to drop towards 1.20.

Many German banks, in particular, have large liquidity surpluses and are presently placing most of this money with the ECB. Once they need to pay for the privilege, the German banks themselves will probably offer lower interest rates on deposits. Recently, many savers shifted their capital from the weak Eurozone countries to the German banks whenever Eurozone tensions took a turn for the worse. This reaction was mainly because these tensions could have triggered a euro collapse, in which case, savings – if left in a peripheral bank – would be denominated in a currency with a much lower value than the euro.

Depositing money with a Swiss bank is a sound alternative to placing it with German banks, even if a number of Swiss banks (intend to) apply a negative interest rate to foreign account holders. Such a disadvantage will become less significant once the ECB cuts its deposit rate below zero. This signals that any rally in EUR/CHF above 1.25 – 1.265 would be a good time to buy francs, particularly for investors who anticipate growing Eurozone tensions in the not-too-distant future.

And there is a real chance of the latter. Clearly, the Eurozone focus is shifting from reorganising public finances towards less fiscal austerity and more growth-boosting measures. The problem is that fiscal stimulus is no longer an option mainly because it costs too much; whereas a monetary impulse that is strong enough to accelerate growth is unlikely especially as Germany could well oppose this, even though it has reluctantly agreed to gradual monetary easing. In that case, mediocre growth prospects and large (and/or expanding) budget deficits in many weak Eurozone countries is a foreseeable outcome. All of this could whip up Eurozone tensions even further and lead to a drop in EUR/CHF (to 1.20) over the coming months.

The Swiss central bank, Swiss National Bank (SNB), will probably manage to defend the 1.20 floor for some time, which means that EUR/CHF could continue to hover around this level in the near future. Only if Eurozone tensions skyrocket and jeopardise the survival of the euro – which is unlikely to happen in 2013 – will it become too risky for the SNB to hold on to the peg.

Another scenario, although less likely, is also possible. Once deposit rates at the ECB turn negative, savers could abandon the low-yielding deposits in the core Eurozone countries and open deposits with banks in the peripheral Eurozone, where interest rates are higher. Such a capital inflow could even prompt a positive spiral. If so, the banks in the debt-laden member states will have more money at their disposal, which they can lend out or use to purchase government bonds in order to drive down long-term interest rates.

Chart 1: Japanese government revenues as % of debt falls, while national debt servicing costs rise
Chart 1: Japanese government revenues as % of debt falls, while national debt servicing costs rise

Source: Thomson Reuters Datastream/ECR

The latter has been happening during the past few months and, if the above scenario unfolds, it could continue for longer. The upshot could be fewer Eurozone tensions. If conditions continue to improve, non-EMU investors could be tempted to purchase euro assets, which would cause the euro to appreciate and drive down demand for safe haven currencies such as the CHF. In that case, an increasing number of investors would withdraw their capital from Switzerland in order to profit from a EUR/CHF rally.


Soon after Shinzo Abe entered the Prime Minister’s office, the JPY weakened considerably against the USD and EUR. Recent figures showing that – for the first time in a long time – Japanese investors have become net buyers of foreign assets has added extra fuel to the rise in EUR/JPY and USD/JPY. If this development persists, a spiral could start whereby the outflow of capital weakens the JPY even further, as existing JPY investors face mounting currency losses. This will spur them on to sell their JPY assets.

Also relevant is the rise of Japanese bond yields. This also suggests that investors are selling Japanese assets (in this case bonds) and moving the proceeds out of Japan. Rapidly rising interest rates could sound the death knell for the Japanese public finances, as the country’s national debt and budget deficits are very large. Owing to higher interest charges, the public finances will spiral out of control, more investors will sell government bonds and bond yields will skyrocket, etc. Before long, the central bank will come under enormous pressure to purchase more government debt (with newly created money) in order to prevent additional interest rate rises, which will weaken the JPY even further.

The risk is low that this will happen in the coming weeks to months. Theoretically, the bond yield rallies and the depreciation of the JPY could set off such a spiral, but there is also the following:

  • The authorities have made it clear that a USD/JPY rally beyond 110 would do the Japanese economy more harm than good. Japanese exporters would benefit from a cheaper currency but the downside – higher import prices – would eat into consumer purchasing power. Therefore the authorities aim for an exchange rate near 100.
  • Outside Japan, there is growing opposition to the rapid depreciation of the JPY. During the recent G7 meeting, Japan once again received approval to continue with its loose monetary policy. However, by now more central banks around the world are starting to ease their policies to prevent their currencies from appreciating too much.

Owing to the above, the Bank of Japan (BoJ) is not expected to pursue a far more accommodative policy than it has announced in the past period. These measures have already been discounted in the exchange rate of the JPY. The same is not true of monetary easing outside Japan.

To give one example, the ECB has cut its rate at the start of May and ECB President Mario Draghi has hinted at more monetary easing. Central banks in, among others, Australia, South Korea and Poland have lowered their key interest rates. Increasingly, this will put upward pressure on the JPY. In combination with an expectation of rising Eurozone tensions in the coming months, EUR/JPY is expected to drop towards 115 over the coming months.

Chart 2: Yen weakness aids exporters but also means Japan pays more for (increasing size of) imports
Chart 2: Yen weakness aids exporters but also means Japan pays more for (increasing size of) imports

Source: Thomson Reuters Datastream/ECR

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