On more than one occasion Forex has proven to be a safe haven for many investors. Due to the inherent connection between currency and the global economy, FX has managed to either stay resilient to massive market movements or retain the majority of its value while other assets collapsed around it.
The most common safe haven for FX traders is the major currency pairs such as the USD/EUR or the USD/JPY. But the resemblance in trading patterns is quite obvious. Whenever there is a market crisis, people tend to rely on their dollars much more than anything else.
Liquidation and market supply
Let’s take a look at why the USD or cash, in general, becomes a safe haven during a market crisis. First, we need to take a look at what people do when the crisis starts.
The most common coping mechanism is selling. When selling, the stock asset is turned into a liquid asset, or cash in other terms. This creates a constant flow of supply into the FX market, which would in time create a crisis of its own if not for the demand.
You see according to analysts from FXTM Forextime brokerage, whenever the stock traders flee to FX, they bring in demand as well as supply with them. Considering how demand and supply don’t necessarily increase with the currencies, it manages to retain its exchange rate more or less. However, what these “refugee” traders bring is volume.
Volume is a key factor in how currencies grow in exchange rates. Considering that most of these refugee stock traders will flock to pairs such as USD/EUR and etc, it’s only natural to see these currencies grow in value.
One financial media outlet, 55brokers actually called it quite a catchy phenomenon, “the self-fulfilling prophecy”.
People believe that the FX market will survive the crash, and just by believing it and migrating over there, it becomes a prophecy that fulfills itself.
Usually, whenever there is a market crisis, 20% of it is caused by the actual reason (natural disaster, political machination or etc) and 80% is caused by investor speculation and panic.
Thankfully, most of the FX market is controlled or “traded” by institutions. Large companies, banks, and government organizations that have multiple people doing the analysis. In these cases, the traders are much more knowledgable and don’t fall into panic as stock traders would.
These are some of the main points about FX being a safe haven, but there are counter-arguments as well. But that’s a story for another day.