Buy offshore yuan. Sell South Korean won. Yen is safest. These are some of the strategies analysts are recommending as the escalating threats between U.S. and North Korea send investors fleeing. Traditional havens like the yen and the Swiss franc have performed well this week while China’s yuan is starting to earn its place as a safe harbor, or is it? The hardest-hit currencies were those of New Zealand, South Korea, Brazil and India.
It’s hardly surprisingly that options traders are the most bearish on the won since June 2013, according to one-month risk reversals. The bigger surprise is that the cost to protect against declines in the kiwi against the U.S. dollar for one month shot up to the most expensive levels since April.
“Bearing in mind how well risk assets have performed this year, and how low volatility is, it unsurprising that this increased geopolitical risk has caused some pull back,” Andrew Bresler, deputy head of sales trading for Asia Pacific at Saxo Capital Markets Ltd. “Hedges in safe havens like gold and Swiss franc are the natural go-to’s. However, investors are also happy to spend a bit of premium to buy downside protection while staying invested.”
Bresler, who is based in Singapore, acknowledged that the overall market reaction has been “relatively muted.”
The possibility of war breaking out on the Korean Peninsula is “very low” and tensions between the U.S. and North Korea will probably dip around September or October, according to Yang Moo-Jin, a professor at the University of North Korean Studies in Seoul. “If the U.S. should target North Korea, it would have to deal with North Korea’s nuclear weapons, and there’s also the possibility for Russia and China to intervene,” Yang said. “It will be a war of words.”