Safe Haven Currencies to Tide Over Times of Uncertainty

In the current uncertain climate, where there is an increase of trade tensions and market volatility, we are beginning to see an increase in demand for safe haven currencies. Since the start of the trade wars back in April this year, safe haven currencies such as the USD, JPY and CHF have generally appreciated against most other currencies. However, to our surprise, the performance of safe haven assets such as gold, paled in comparison.

We attribute this to two main reasons.

1) Rising interest rate environment
Since the last year, central banks across the world have started to unwind its stimulus measures. In a rising interest rate environment, currencies and yield bearing assets such as bonds and treasury notes tend to benefit more when compared to non-interest bearing assets such as Gold and Silver.

2) Strengthening USD
Gold and the USD generally share an inverse relation with each other. At present, markets are expecting the USD to strengthen further given the Fed's hawkishness as compared to other central banks. There has been an increasing probability that the Fed will raise interest rates another two more times this year. Data for CME Fedwatch shows that there is a 98.4% chance of the Fed raising rates during the next FOMC meeting in September. With USD expected to strengthen, Gold prices is expected to weaken further.

Overall, we are of the view that safe haven currencies will continue to outperform. Given the current landscape and central bank policies, it comes as no surprise then that safe haven currencies will remain as an alternative to investors, especially in the run-up to the US mid-term elections in November.

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