The only way is $
The Dollar has served as the first-choice safe haven currency during this latest bout of geopolitical risk. Safe havens need to exhibit lower levels of volatility during times of elevated risk and, on balance, exhibit a negative price correlation with perceived risk. As geopolitical risk was on the rise over the last two weeks, non-Dollar safe havens were few and far between. USDCHF, for example, on the first trading day after the initial strike on Iran saw the Franc lose some 1.6% in value to the Dollar during the London session. The Franc of course has been well bid against other currencies but is failing to win the battle for safe haven of choice in comparison with the Dollar.
The Yen has been all but ruled out as a viable haven under current conditions given the rapidly evolving domestic inflationary and economic picture following the snap election in February. The argument that the Japanese Yen is a valuable safe haven always used to follow the narrative that in times of elevated risk, international companies operated in Japan would repatriate profits. With Japan having secured one of the most one-sided trade deals with the US, a record $550bn investment commitment will all but exhaust domestic companies’ ability to repatriate overseas earnings.
This brings us to today. The options market shows a market heavily bearish on the Euro with short term risk reversals increasingly reflecting a premium for gaining downside exposure to the Euro. At the same time, the Dollar now sees bullish positions, expecting to benefit from upside in USD, as crowded as they have been at any point since 2022. Elevated commodity prices will continue to keep the Dollar bid, keeping yield differentials skewed in favour of higher USD premiums as inflationary pressures build.
Discussion and Analysis by Charles Porter
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