Which Currencies Will Provide a Safe Haven in 2016?

2015 turned out to be a bit of a roller coaster ride for many currencies in 2015 with noticeably large movements at certain times in emerging market currencies and the euro in particular.

Sterling managed to display a sustained recovery and the US dollar also managed to largely reflect a steady economic performance in the context of a weaker global backdrop to contend with.

A global environment which remains challenging with political tensions and other significant events creating a sense of unease in financial markets helped to create periods of increased exchange rate volatility in 2015 and there seems to be little reason to not think that 2016 is going to offer much of the same.

Past events a guide to the future?

Many investors are probably familiar with the usual investment warning carried on many financial products about past performance not being a reliable guide to the future but by taking a look at some key events in 2015, it can often provide some insight as to how currency markets are likely to respond.

The European Central Bank started 2015 by announcing a massive quantitative easing program which immediately weakened the euro in response and the ECB are going to be buying €60bn per month of bonds right through to March 2017, so you already know what is in store on that front for the coming year.

The rabbit is now out of the hat when it comes to an interest rate rise from the federal reserve as they finally made the move in December 2015 but 2015 was punctuated with frequent speculation and rumours about an imminent rise. This caused the US dollar to fall to a four-year low in April 2015 so perhaps you should factor in further fluctuations as markets try to second-guess the Fed’s next move.

Other significant events that impacted currency markets in 2015 include China’s black monday in August and not forgetting that the year started with the Swiss franc soaring by 30% within a matter of minutes after the Swiss National Bank scrapped their euro cap.

These past events and the market response to them demonstrate how news and events have the capacity to stir currency markets in life or into a panic, so it is probably safe to assume that 2016 will offer its fair share of seismic events at certain times.

So which currencies will provide a safe haven for investors in 2016?

Factors that are likely to influence currency markets in the next 12 months

Further US Federal Reserve interest rate rises are probably going to be the most influential factor although changes in Chinese exchange rate policy and additional ECB stimulus announcements would also be significant factors.

Any changes in commodity prices and further global geopolitical tensions will also play their part but as a starting point for making some sort of predictions of which currencies might prove a good bet, logic dictates that higher US interest rates should help to ramp up the dollar.

What will almost certainly be different this time around with the Fed is that the rate hike cycle is going to be far more difficult to predict that in the past. This will likely mean that markets will generally struggle to correctly price in future Fed policy so this is one such example of how the past is not going to prove much of a guide to the future.

The Fed itself has a dilemma to contend with as it has to get the timing of subsequent rate hikes just right if it doesn’t want markets to under or over-react.

Identifying a safe haven currency

A safe haven currency is by definition a currency which investors want to buy into and hold during periods of economic and political uncertainty.

There are a number of key characteristics to look for in order to identify a potential safe haven currency.

If a country can demonstrate strong economic growth and stability and has its finances in order as well as a stable political system, these are key attributes that help mark it out as have safe haven currency potential.

Liquidity is also a key issue as you want to be able to buy and sell the currency with ease when you want to.

Top of the list in terms of ticking all of the above boxes is the Swiss Franc although the Swiss National Bank’s move to scrap the euro cap was a game changer especially as it had previously vigorously defended their minimum exchange rate position up to that point.

Switzerland still has a very low debt-to-GDP ratio and a very stable political system. Combined with its infamous political neutrality that has seen it avoid any sort of conflict since 1815 and the fact that it is seemingly resilient to recessions, the Swiss franc can still be considered a safe haven currency play in 2016.

The US dollar has traditionally been the default safe haven currency when the global outlook is less than positive and this was demonstrated by the fact that the dollar managed to strengthen against a basket of different currencies by as much as 30% in the space of just six months in the aftermath of the global financial crisis in 2008.

The US dollar accounts for about 40% of all daily FX transactions so liquidity is hardly an issue although an eye-watering debt pile of more than $17 trillion just take the edge of any enthusiasm that you might have built up at this point, but at least it does boast and strong and robust economy to try and service these levels of debt.

Economic power and the size of their economy are almost always going to be determining factors when it comes to identify currency safe havens and investors perceptions of how safe their money is plays a big part, which is why countries like China, Russia, Brazil and Japan struggle to qualify for safe haven status in the minds of a number of investors.

In terms of which currencies will provide a safe haven in 2016, the US dollar is a predictable but obvious inclusion on the list, especially given the influence it has on currency markets in general and the high levels of liquidity for trading.

If you are looking for something a little less obvious then the Norwegian crown might have potential, in view of the fact that it has oil, a substantial $570 billion wealth fund and no European Union membership to concern itself with. Even allowing for the collapse in oil prices it is a country which could arguably offer some potential as a safe haven currency in 2016.

Investing in currencies

One alternative investment idea to consider when looking to invest in currencies would be through a platform such as Currency Shares where you get the opportunity to invest in a currency trust, which is being promoted as a cost-effective way of gaining similar investment benefits to that of holding foreign currencies directly.

This is not a recommendation to invest in currencies this way and you should definitely seek independent advice and do your own research before committing any funds.

Another way to get involved in currencies is through one of the various exchange traded funds and again you should check out the range of options available to see if they offer a suitable alternative to trying to buy currencies directly via your own forex account.

Currencies can provide a useful tool for diversification in your portfolio away from securities and if you decide to invest in safe haven currencies in particular, the theory is that you should not experience a great deal of volatility, but there are of course no guarantees on that score.

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Elizabeth Goldman is the editor of AlternativeInvestmentCoach.com. She has written for Investing.com, Bullbearings.com and many others.