Safe Haven Currency and Market Uncertainty: Yen, renminbi, dollar, and alternatives

Author Name MASUJIMA Yuki (Bloomberg L.P.)
Creation Date/NO. March 2017 17-E-048
Research Project Exchange Rates and International Currency
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This paper investigates the relationship between market uncertainty and exchange rate movements of safe haven currencies that tend to appreciate during the risk-off episodes. A safe haven index—the tendency of currency movements to a change in market uncertainty as measured by the Chicago Board Options Exchange (CBOE)'s volatility index (VIX)—are calculated to assess if a currency has a safe haven tendency. The results indicate that the yen is a safe haven currency and its status is robust. The offshore traded renminbi (CNH) has a vulnerable status to the U.S. dollar and the yen, while having lost its safe haven status to the euro since mid-2014. The won, rupiah, and Singapore dollar tend to be vulnerable. Higher market uncertainty with policy swings may increase safe haven demand for alternative assets such as gold and bitcoin, but not substituting for the yen and the dollar due to limited liquidity. Safe haven gauges help explain the uncovered interest rate parity puzzle associated with carry trade. The implication from the results suggests the yen's strength driven by its safe haven status may slow down the post-crisis recovery via exports, masking the vulnerability of government finance with massive monetary easing. The CNH's shift to a vulnerable status could accelerate capital outflows, supporting export-driven growth. The yen's safe haven status would help balance capital flows within Asia, contributing to post-crisis economic recovery in the area.