Safe Haven Currencies Are On Fire!

| July 27, 2011 | 0 Comments

It’s no secret we’re in the midst of a global debt crisis.  And it’s ugly… brutally ugly.

In my entire life, I’ve never seen more partisan politics for the sake of partisan politics.  It’s a sad commentary on the political system we have.  But we asked for it, didn’t we?  Didn’t we elect these leaders to represent us?  So what does that say about us?

All good questions, but let me get straight to the point…

Right now, we’re seeing debt crises playing out in both the US and the EuroZone.  The US Dollar should have been the clear winner in what I’ve been labeling the battle of ugly ducklings.  But the EU was able to spit out some sort of answer to investors.

In the process, the Euro has found a serious advantage over the US Dollar… for now.  I’ll circle back to that in a minute.

With the Euro and US Dollar both in question due to runaway debt, the big question is which currencies are safe plays right now?

Before I let you in on this secret, I’m going to explain what a “safe haven” currency is.  I’ll also show you the top three safe haven currencies today.  And then I’ll circle back to discuss what I see for the future of the US Dollar.

A “safe haven” currency is simply a currency in which investors and fund managers park their funds during times of market turmoil.  These currencies are believed to offer the most stability during periods of financial, political, or economic crisis.

The Swiss Franc (or Swissie) is what holders of the Euro buy when the markets get bumpy.  Since Switzerland is a small neutral country, investors have always felt safe holding their currency.  The country rarely suffers from political or financial uncertainty.  And the tiny country has been a banking center for the world’s super-rich forever.

With the EU in crisis, the Swissie is once again flaunting its safe haven status.  Investors are piling into the currency as the EU debt crisis wears on.  A trend I don’t see changing anytime soon.

As you can see in the above chart, the Swissie is climbing to new highs virtually every day.  In fact, a few weeks ago I rolled out a trade in the Currency Options Insider service.  I told subscribers to buy the Swiss Franc.  And now we’re sitting on some fat profits!

Japan’s currency is considered a traditional safe haven due to the liquidity and stability of the Yen.  As such, many investors are happy letting their funds sit in the currency.  Some currency traders use the Yen in what’s known as the “carry trade”.

A carry trade is where investors can borrow Yen at Japan’s virtually zero interest rate and buy higher yielding currencies.  And since Japan keeps their interest rate unchanged at 0.10%, traders are confident they’ll be able to turn a profit in the carry trade.

In the chart above, you can see the Yen hitting new 52-week highs.  And it’s not because of great economic news in Japan.  The reason is simple… the Yen is a safe haven for virtually all currency investors.

Unless you’ve ignored the markets for the past two years, you’d know Gold keeps making record highs!  And after a brief pause, it’s at it again.

While Gold technically isn’t money (just ask Fed Chairman Bernanke), it is considered the hard currency.  There’s real intrinsic value in gold, unlike paper money.  And as a tangible item, gold has seen investors flock to it in droves.

Now, many of you may be wondering, “What about the US Dollar?”  “Why isn’t the US Dollar on this list?”

It’s weird for me to even write this… but the US Dollar isn’t a safe haven currency right now.  The debt ceiling crisis has refocused attention on America’s astronomical debt.  And the skyrocketing deficit has the rating agencies poised to downgrade the US debt rating from the vaunted AAA status.

And that’s a sad statement.  Because the number one safe haven currency on the list has always been the US Dollar.  Always.

The greenback is the place every investor usually feels safe holding their funds.  You can simply look at foreign governments, such as China.  They hold over $3 trillion worth of US debt!

The reality is the world is scared of a potential US default and further devaluation of the US Dollar.  And the longer Congress drags out the debt ceiling crisis, the more damage that gets done to our reputation as the world’s number one payer of debt.

The gold line shows the price movement of Gold over the past year.  Along with the other safe haven plays I discussed earlier, Gold is moving up and to the right.  And they’re making record highs in the process.

The black line on the bottom, that’s the US Dollar…

It should be mixed in with the other “safe haven” currencies… but sadly it’s not.

In my opinion, the US Dollar has the best chance to move higher in coming weeks.  And we’ll probably see some selling of the other safe haven currencies I just talked about.

Here’s the deal…

Once Congress finally raises the debt ceiling, puts a plan through to cut the deficit, and shows the world the US can handle its business… we’re sure to see the US Dollar jump higher!  The selling in the greenback has mainly to do with the debt crisis squabbling.

Now once this short term problem is fixed, we’ll see the US Dollar regain its rightful place as a safe haven currency.

I think it’s a great time to be a US Dollar buyer.  While everyone is selling, you can buy the world’s reserve currency on the cheap.  When the rebound happens, you’ll bank a nice profit!

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Category: Currency Trading

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