June 21, 2016    5 minute read

Pacific Parallels: CHF and SGD

   June 21, 2016    5 minute read

Pacific Parallels: CHF and SGD

Although often confused with a hedging instrument, a haven asset is an investment that is expected to retain, or potentially increase in value, during times of market distress. Such an asset, be it a currency, a bond or a commodity, is uncorrelated with equity and fixed income securities during market turbulence and is hence favoured by investors because of its stability and easy liquidation.

Safe havens have traditionally been green and gold

When investors take the flight to safety, United States Treasury Bills are typically considered a haven asset as they are backed by the full faith and credit of the US government; a more than capable backstop for most financial batters in a particularly hit-and-miss game of banking baseball. Since the creation of the fixed exchange rate system of the Bretton Woods Agreement during the Second World War, some countries have bought the US Dollar (USD) for their foreign exchange reserves which have buoyed its value and its haven reputation. To this point, USD is perceived to be the most liquid currency in the world and accounts for a noteworthy 40% of all daily FX transactions despite recent volatility.

As opposed to fiat money, which is not backed by a physical commodity, gold has some characteristics that have allowed it to become perhaps the most traditional of all safe havens: a unit of account, a holder of value and its tangibility. The Federal Reserve and many other central banks have the power to press their proverbial money-making button, run a couple of macros, update the odd spreadsheet and produce a few trillion dollars without too much trouble. As you are aware, gold cannot be produced out of thin air in this way. It is believed that all of the gold ever extracted from the Earth could only fill two Olympic-size swimming pools, according to National Geographic. Due to the limited growth in the supply of gold, this precious metal is an enduring store of value. An ounce of gold in the 1500s would buy you a perfectly-tailored suit and guess what; half a millennium later, an ounce of gold would still buy you a perfectly-tailored suit. A bonus of this physical asset, unlike fixed income securities and foreign currencies, is that its value cannot be manipulated by the interest-rate decisions of a country adding to the degree to which value is held within the bullion.

Swiss stability

The safe-haven reputation of the Swiss Franc (CHF) is distinguished in all four corners of the globe. Despite the Swiss National Bank (SNB) unpegging their currency from 1.20 against the Euro (EUR) in January 2015, stability has been the common denominator for many years. Thanks to its economic stability, the Swiss enjoy one of the highest levels of GDP per capita and a very high quality of life to follow suit. Economically diversified, Switzerland boasts prestigious wealth management and private banking sectors coupled with world-player status in pharmaceuticals and engineering. Given its physical proximity to major European players, mainly France and Germany, the country and the CHF benefit from the upside potential of the European economy in general without performance being diminished by negative moves in the EUR. Renowned for its political neutrality, Switzerland has not been at war for 200 years and has not seen any major regime changes between presidential terms. The combination of these characteristics renders the CHF an attractive place to deposit assets during times of market turmoil.

Singaporean similarity

Despite being worlds apart geographically, there are some similarities between the Swiss economy and that of its Singaporean counterpart. With identical AAA credit ratings on its sovereign debt, Singapore brags the title of being the only south-east Asian country that is seen as a developed market in the eyes of investors globally, in contrast to its emerging market neighbours. Likewise, the contrast between Singapore and the rest of Asia is like day and night regarding the degree of corruption as Singapore ranks 5th globally among the least corrupt countries in the Transparency International Annual Corruption Perception Index. Akin to their European equivalent, the Singaporean economy is comparably small, surrounded by economic powerhouses. Profiting from a high degree of openness to international trade, the country sees significant capital flows which have helped the world’s only island city-state to become a major financial centre on the global stage.

However, there are some key differences between the two nations. The Singaporean Dollar (SGD) is not free-floating and is pegged to a hidden basket of currencies. The Singaporean central bank, the Monetary Authority of Singapore (MAS), implements a nominal effective exchange rate which corresponds to the trade-weighted SGD exchange rate, reflecting its diversified trade links. The characteristics of the targeted exchange rate are not disclosed and allow the MAS to protect the domestic economy from imported inflation and maintain the competitiveness of Singaporean exports. By using the exchange rate rather than the interest rate as the main monetary policy tool, the MAS can have a better handle on currency appreciation. Permitting a gradual and modest appreciation of the SGD, investors have a built-in return when holding the currency, regardless of market turbulence. This key characteristic could sustain and add to the status of the SGD as a global haven.

Safe havens yet to show their true colours

Could we see haven assets go from green-and-gold to Swiss-and-Singaporean? Given the 10Y Bund yield dipping into negative territory last week as well as uncertainty over Federal Reserve rate hikes and the outcome of the impending EU Referendum, investors may seek out less traditional safe havens to shelter their assets from the potentially stormy seas ahead.

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