In times of political or economic uncertainties, analysts have historically recommended investing in safe-haven assets. Typically, the most common assets associated with safe-havens are the Japanese yen and gold.
High degrees of uncertainty can spark investor fear, which can abruptly affect markets. This is especially true in stock markets as well as commodity and FX markets.
During troubling times, safe-havens are the destination for investment, while more volatile assets such as emerging markets currencies experience notable declines.
This trend was on full display recently with the tensions growing between the US and Iran earlier this month.
With the severity of the fallout from the US’ actions in the region uncertain at best, or how precisely Iran would retaliate, investors grew concerned.
The conflict started on January 3 and the escalation continued until January 8, while tensions eventually abated. Safe-haven assets were expected to strengthen and for the most part did.
Is the JPY still a safe-haven?
In terms of the Japanese yen, there were more factors holding sway, causing many investors to rethink the currency as a true safe-haven.
First, there has been a willingness from domestic asset managers to buy higher-yielding foreign assets. Additionally, there is a trade deficit of Japan, which has impacted the JPY, in tandem with overseas capital flows of Japanese companies.
Investors have also had to grapple carry trade strategies. This idea of a carry trade is to borrow the low-interest currency and invest in the higher-interest currency.
However, since late 2019, the major central banks have been easing their monetary policy.
The basis of the loose policy is the lower interest rates. That means the advantage of the Japanese yen as a low-interest currency has been vanishing.
This year, the central banks are anticipated to hold the rates unchanged. This factor has not lent to supporting the Japanese yen.
By extension, lately analysts have come to believe the euro, with its extremely low rates, can be more attractive for carry-trade traders.
Impact of virus outbreak in China
More recently, the Coronavirus in Wuhan, China has also impacted currency markets. Much like the Iranian political tensions seen earlier this month, this virus has indeed seen a notable strengthening of the JPY, particularly against the USD and other currencies.
After peaking at a monthly high on January 18, 2019, the USDJPY has fallen each day and is approaching monthly lows, not seen since the January 5.
With the situation worsening, the pair is expected to touch or exceed monthly lows as China has taken additional steps to quell the outbreak of the virus to limited effect.
The stability of gold
Gold is the other safe-haven asset that’s been a tried and true strategy for any investors during periods of turmoil. This was true during the Iranian-US fallout and especially now with the Coronavirus in China.
The price of the yellow metal has mirrored perfectly the deteriorating circumstances in both Iran and China, with each seeing the notable strengthening of gold.
In particular, against the XAUUSD pair has been gaining in recent weeks and is expected to continue with no sign of slowing down.
There are now global fears radiating out of China as the local government has been figuring out ways of quarantining the virus.
Any expected uptick in cases or a further outbreak would see investors continue to flock towards gold, increasing its value.
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