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Lesson 10: Safe Haven Currencies

Safe Haven Currencies, CHF, Swiss Franc, JPY, Yen

Safe Haven Currencies, CHF, Swiss Franc, JPY, YenAfter seeing the correlation in Forex, in this article we will treat the Safe Haven Currencies, We must have clear all the strong points, but also realise what we have to maintain under control. Because it is not only necessary a strategy, but also to know what might put us in trouble and when this happens, we can close the position even without having reached the stop loss.

When there is fear, there is emotion. Markets are emotions. And if we have to classify the feelings, when there is a fear we go emotionally on CHF and JPY. We must also take care of the psychological aspect because in trading there are the machines, but there are also human beings, and in the end, it all comes down to psychology, and when there is fear, the CHF is bought, JPY is bought.

Let's begin to analyse these relationships, and after we have to improve them taking the best points on the chart. We start to move trying to read the emotions because they are the ones that can make big movements. Then there is also the technical aspect as well. However, we try to draw the line, when there are emotional difficulties everybody goes on these two currencies.

But here we have to ask ourselves some questions: to buy Yen, but against which currency? In what moment? Does the Swiss Franc have positive components? When is it wise put it in the portfolio and when not?

The CHF has some aspects a little particular. Besides being a safe haven currency, it also has advantages from the oscillation of its currency, being Switzerland an exporting country.

The first step, then, to keep always in mind is that since Switzerland is an export-led economy, a Swiss Franc too strong will generate a lot of problems in the export. This is one aspect, however, that when compared with all the rest is inferior as importance, or better as strength.

Because if for example, the ECB is using only 5% of QE, it means that the ECB can use a liquidity higher than the European GDP. From this, we can understand that the force of a central bank like the ECB is superior to the will of a small nation. We have to keep in mind this; we must have always clear which are pros and cons.

So, we can use Eur-Chf which has a point in favour. It is a currency pair that not much moves in terms of volatility compared to the other currency pairs, and this puts us in the position to work it more comfortably.

Moreover, we cannot look at another currency pair with CHF (for example Usd-Chf), in the same way of Eur-Chf, because there is a different basic analysis. It is true, you have CHF (safe haven currency) on both the currency pairs but change the conditions. On the one hand, there is the Euro, the Eurozone, where there is a close economic relationship and where it is difficult that Eur-Chf moves very strongly. This because there is a very narrow relationship from a commercial point of view.

On the other side, we have Usd-Chf that suffers more than other currency pairs (in particular Eur-Chf) because there is not a relationship between the Swiss economy and the US economy strong enough to control the exchange rate. So it becomes a currency pair that suffers the effects of the stronger currency, the ones where there is much more interest.

We have to go behind the scenes of the two economies, of the two currencies that make up the currency pair. Sometimes they can be speeches a little complicated, but it will allow you to have a broader view not only in Forex but all the financial markets.

As in spread trading, in which we have to analyse the two legs that make up the spread, here we have to examine the two economies that make up the currency pair. Closer is the relationships between the different economies, the more the control is done with greater force.

In summary, Eur-Chf is very controlled because too important oscillations could go to undermine the Swiss economic aspect of exports and, so, they would put Switzerland in great difficulty. While on Usd-Chf fluctuations are much larger. So if we have to move for protecting our portfolio, it is much easier to do it on Eur-Chf where we have more "control", Usd-Chf instead undergoes more the movement of the most important currency pairs and then undergoes the mathematical differences that are created inside the Forex.

Eur-Chf is slightly anticipatory of Eur-Usd for its variables of coverage. There is a very close movement between Eur-Usd and Eur-Chf, especially in certain situations. When you arrive at important points of Eur-Chf, this can determine what might happen to Eur-Usd, even though this is a bit also dictated by experience. Very often, we use Usd-Chf as "stepchild" opposite of Eur-Usd. It is not a relationship that remains for all the life and in all market moments.

Eur-Chf is a bit more controllable than the Yen because a movement of 300/400 pips Eur-Chf does it in months, Eur-Jpy and Usd-Jpy, especially with a little hint of crisis, they can do that also in a couple of days. This does not mean that we cannot cover us by buying Yen against Euro or another currency. We have just to be a little more vigilant and being often in front of the monitor to follow the development of the currency pair.

In conclusion, it is important to have CHF in our portfolio but always taken at certain levels. This allows us not only to cover us from other Forex operations but also with our whole portfolio. Alternatively, we can use JPY, but we must always keep in mind that while Eur-Chf is easily controllable thanks to the economic relationship between the Eurozone and Switzerland, Yen is more volatile and requires a presence in front of the monitor.

In the next article, you will learn what the Commodity Currencies are.

 

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