Previously strong currencies such as the US dollar and GBP can be greatly affected by a geopolitical crisis such as the pandemic and, more recently, the tensions with Russia and Ukraine. Uncertainty, therefore, results in potential investors being unwilling to place their funds into a country and currency where the economy appears unpredictable.
When the market is volatile, it could be worth investing in safer options that are more likely to withstand the impact of any geopolitical instability. This article will explore the factors that create a stable asset as well as why they’re a good idea for forex traders in an uncertain market.
How is the forex market affected?
The largest financial market across the world, foreign exchange is heavily influenced by political and global events, especially those which lead to unstable economies. Such factors include elections, conflicts, pandemics, and natural disasters. All of these can knock confidence in a country’s currency and economy, meaning decreased investment and a reduction in value.
Recent events which impacted the British pound include Brexit, the Covid-19 pandemic, and, in 2022, the uncertainty of the Russia-Ukraine crisis. Having bounced back from the pandemic, the UK economy is likely to suffer another wave of instability with soaring inflation adding to the problem.
What is a safe-haven asset?
Essentially, an asset that’s classed as a safe haven is one that can maintain or gain value even through economic volatility. If an event or crisis affects one or more major world economies, there is usually a knock-on effect felt throughout the market. But with a safe-haven asset, there is less chance of the investment to be impacted.
The Swiss Franc has always been considered to be one of the safest currencies due to multiple factors. A historically neutral country, Switzerland is not part of any alliance or, indeed, the EU so is rarely impacted by geopolitical events or sanctions. The Swiss government and financial institutions are stable and residents generally enjoy a good standard of living. Together, these aspects mean relatively low risk for traders using the Swiss Franc.
Why Forex traders should consider investing in safe-haven assets
Assets like the Swiss Franc can be useful currencies for forex traders when the market makes a downturn as they can pose less risk than others. Commodities are also classed as safe-haven assets, particularly when the whole global market is affected rather than just one or two countries.
Such commodities include gold, silver, and copper as well as energy, agriculture, and livestock Although these might seem like more traditional ways to trade, they can be a safe bet for traders in uncertain times.
Whilst safe-haven assets can be a more stable way of trading, the value of these can still increase and decrease over time, especially once the market rises again. And if the market endues a long-term recession, almost all commodities and investments will fall in value.