With major currencies, there is a distinction on whether they are risk or safe-haven currencies.
Risk currencies behave like other risk assets, such as stocks or industrial commodities like oil, gas, copper, etc.
They rise when markets are feeling optimistic, and fall when markets are nervous.
Safe haven (safety) currencies behave in the opposite manner, like other safe haven assets such as investment grade bonds, rising in times of fear and falling in times of hope.
These classifications have nothing to do with how safe a given currency may be as a store of value.
These names refer only to whether the currency generally behaves like other risk or safe haven assets.
For example, although the Canadian Dollar is considered a risk currency, Canada’s relatively strong economy and healthy banking system makes the CAD one of the safest currencies as a long-term store of value in which to have your savings.
The risk ranking
Which currencies benefit most when markets are feeling optimistic?
Here’s the traditional ranking of currencies in order of risk.
Risk: AUD (Australian Dollar), NZD (New Zealand dollar), CAD, EUR, GBP.
Safe haven: CHF (Swiss franc), USD, JPY (Japanese yen).
This means that when risk assets are rising (“risk on” market), traders typically get one of the following:
- Long pairs, that have a base currency that is higher on the risk scale than their quote currency, like the AUD/JPY or EUR/USD.
- Short pairs that have a base currency that is lower on the risk scale than their quote currency, like the GBP/AUD or EUR/NZD.
When risk assets are falling (aka a “risk off” market), traders typically do the opposite.
The ranking is a useful generalization, but rarely works perfectly for a given period.
Currency-specific news items regularly cause currencies to behave out of order from this ranking.
For example, even if markets seem very pessimistic, if there is bad news for the JPY, it may not be strong that day despite the market being in “safe haven” mode.
On the other hand, in times of optimism, the AUD could underperform the other risk currencies due to specific events or conditions influencing it, like slowing growth or sinking expectations about interest rate increases in Australia or bad news about the economy of its biggest export customer, China.
Well this is all for now, hope this helps in making good decisions on your binary investments trades.
Happy Trading and enjoy….