Gold and yen to keep safe-haven status: Traders' fear-favorites unlikely to change in 2020

Starting out 2020, the two biggest risks that we faced through 2019, including hard-Brexit and US-China trade war, seem to have subsided. However, the US-Iran geopolitical escalation has reared its ugly head at the outset.

Additionally, looming uncertainty around the US Presidential elections and expectations of modest economic growth, amid accommodative global monetary policy, will likely keep the investors cautious and snapping up safe-haven assets in 2020.

Since these themes will dominate the global financial markets this year, the classic fear-favorites for the investors are unlikely to change.

With 2019 in hindsight, gold, the Japanese yen, the Swiss franc, the US dollar and Treasuries have served investors as shelters when risk trades vanished from the markets, given their relative stability and liquidity.

Gold, US dollar and US Treasuries

Gold, as an ultimate store of value, outperformed other havens in 2019, rising over 15%.

In 2020 so far, gold prices have reached the highest levels since April 2013 amid heightening US-Iran tensions. The Mid-East tensions escalated after the US killed a top Iranian Quds commander Soleimani and an Iraqi militia leader last Friday, with threats traded from both sides, at the time of writing.

The yellow metal is likely to emerge as the best safety-bet in 2020, as the easy monetary policy regime is expected to extend amid subdued price pressures globally and lingering concerns over economic growth.

Major central banks across the globe, including the Bank of Japan (BOJ), European Central Bank (ECB) and Swiss National Bank (SNB) have adopted the negative interest rate policy and seem to have run out of tools to ramp up growth and inflation. 

The US Federal Reserve (Fed) is expected to maintain the rate cut pause, although markets are not ruling out a rate cut by end-2020 should the US Presidential election outcome and/or US-China trade war derail the US economic growth prospects.

Also, any harsh retaliation from the US and Iran could spark a fresh leg higher in gold. In light of the above risks, the non-yielding gold could benefit as markets shun risk/ higher-yielding assets amid market unrest and panic.

“Further, the current bull market in US equities that started in March 2009 is the longest on record. The magnitude of the rally is looking increasingly unreal and could force investors to diversify into gold”, FXStreet’s Analyst Omkar Godbole noted.

Now, looking at the prospects for the US dollar, the US currency could come under pressure across its main rivals this year if the Fed delivers a rate cut or on a potential US-China trade resolution.

It’s worth noting, gold and US dollar moved higher in tandem last year, although the extent of the demand in the traditional safe-haven (gold) was unmatched. The greenback maintains its safe-haven appeal as it is the world's reserve currency and the denomination for many international business deals.

Likewise, even the demand for the US Treasuries picked up pace in the last quarter of 2019. However, it had more to do with the Fed buying them in order to calm the troubled Fed Repo and Treasury market. Treasury bills are considered to be risk-free, as they are backed by the credit of the US government.

However, upbeat US stock market performance amid likely improvement in the US economic outlook and US-China trade optimism could bode ill for the US Treasuries.

Yen and Swiss franc

For the longest time, the Japanese yen has been considered as a safe-haven and it’s the most sought-after currency during periods of risk-aversion. The year 2019 was no different for the yen, as it gained nearly 1% against its American rival amid the above-mentioned political, growth and trade risks.

The yen appreciation will likely continue this year possibly due to the US-Iran risks materializing, revival in the US-China trade tensions and re-emergence of global recession fears. Geopolitical tensions could dent global economic growth, especially if the price of oil increases further.

Despite muted Japanese economic growth, negative yields and deflationary pressures, the yen continues to enjoy the safe-haven status, courtesy Japan’s massive holdings of foreign assets and carry trade unwinding. Usually, when markets turn risk-averse, the Japanese tend to repatriate their capital, causing the domestic currency to strengthen.

Meanwhile, the Swiss franc, which is often considered as another safe-haven currency, will also remain the go-to choice for the investors amid a flight to safety. Switzerland enjoys hefty current account surpluses just like Japan. The Swiss currency rose 1.4% vs. the USD in 2019 and will continue to its uptrend going forward, although the SNB’s intervention on foreign exchange markets to rein in the ‘overvalued franc’ could limit the gains in the safe-haven.

This article belongs to the 20 trading ideas for 2020 series. Check the full list of 2020 pieces.