The Great Debate UK
There are traditional relationships that the financial markets respect. For example, when the markets are tanking the world wants to own safe havens like the yen, the Swiss franc, U.S. debt and gold. If volatility spikes investors go into auto-mode and are almost pre-programmed to purchase these asset classes.
But just how safe are the safe havens? Both the Japanese and Swiss authorities intervened to limit the appreciation of their currencies in recent days. The Swiss National Bank (SNB) did so first by slashing interest rates and announcing a new QE program to flood the economy with money to try and put downward pressure on the franc. The Bank of Japan (BOJ) embarked on something similar, but they directly intervened and sold yen in the markets.
While some people will question the timing of the move, there can be no doubt that the Japanese and Swiss authorities don’t appreciate having currencies that are safe havens and will do all they can to try and break this association. The result has been volatility. The euro had rallied to record lows versus the Swiss franc before bouncing on news about the SNB. But once the dust settled investors went right back to doing what they have been told: buy yen and Swiss francs during market turbulence.
The essence of a safe haven should be stability. It needs to act in a predictable way during times of panic. However, the SNB and BOJ have turned this on its head. They are willing to fight the prevailing trend even if it means throwing good money after bad. But although the Swiss franc and the yen are both likely to keep their status for now, political risk for both currencies has surged higher.