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Investors Dump of Safe-Haven Currencies

11 November 2020 By Mircea Vasiu

On Monday, the world received a much-deserved dose of optimism. The preliminary results of an experimental vaccine developed by Pfizer in the United States and BioNTech in Europe revealed impressive results. More precisely, the efficacy against the COVID-19 spread exceeds 90%.

The news created turbulence in financial markets around the world. A rotation suddenly started from what was considered safe-haven to normal, regular assets.

Perhaps the quickest market to react was the currency market. However, stocks reacted fast as well, as seen in the declining tech sector and rising cyclicals. As a side note, the tech sector in the United States acted as a safe-haven in itself, as investors sent the valuation of some tech companies to unthinkable levels. Now that a vaccine solution might be possible sooner than later, the rotation from “stay at home” and “remote work” companies (e.g., Zoom, Amazon, Microsoft, Facebook) to airlines, cruisers, entertainment, and leisure companies, banks (e.g., Disney, Delta) has begun.

How Did the Currency Market React?

One of the strongest currencies during this crisis was the CHF. Despite the SNB making no secret in intervening to the detriment of the CHF, investors kept bidding for it. It is still viewed as the safest currency to own during a recession, together with the JPY.

Well, the positive COVID-19 vaccine news sent the CHF lower across the board. Perhaps the most visible reaction took place on the GBPCHF cross.

This cross used to be one of the most volatile crosses part of the FX dashboard. When measured by the ATR (Average True Range), few other currency pairs exceeded in the past the GBPCHF’s volatility. However, during the 2020 pandemic, or since March, the cross just consolidated on the horizontal. Every time it tried to break above the 1.20 level it was knocked down by sellers.

Only this week it broke higher with conviction. It benefited from strong outflows from the CHF and the general dump of safe-haven currencies.

The JPY fell as well. The USDJPY pair, the most relevant of them all, rose from 103 to 105.50 and it is only Wednesday. Similarly, USDCHF bounced strongly from the magical 0.90 round number.

If gold is money, the price of gold was knocked down too on the news. Gold is viewed as a hedge during recessionary conditions. However, if this vaccine news signals the end of a recession, gold denominated in USD fell over a hundred points from $1,970 to $1,870.

Safe-haven currencies send a strong signal. Will equity markets follow?