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Currencies That Have Been “Recession Proof”
By Sean Hyman on December 4, 2008 | More Posts By Sean Hyman | Author's Website
One thing that I love about the currency market is that there is always a currency or two going up at all times, even when stocks and commodities are getting thrashed.
The global slow down that has punished stocks for well over a year now has seemed to have “blessed” a couple of currencies out there.
What? You mean, some currencies can actually benefit from “hard times”? Yes, that’s exactly what I mean.
Let’s take a look at the chart of the Japanese yen below since “a picture is worth a thousand words”. I’ve overlaid it on a chart of the S&P 500 so you can see how “inversely” they have tended to trade against each other.
The Yen Doesn’t Even Know There is a Recession!
So why in the world could a currency actually rise in value, especially since Japan is in a recession just like Europe and the U.S.?
Well, it’s like this…In “tough times”, money wants to run away from assets that appear to be lofty or risky and run instead to assets that have been severely beaten down. That way, they may tend to either, not fall at all, or fall less than most other financial assets out there in the markets.
Two of the most “sold” assets in the “good times” were the U.S. dollar and the Japanese yen. You would see reports on the nightly news about how both were plunging as stocks and commodities were soaring.
As Stocks Perished, the Yen Flourished!
However, now the exact reverse has been true. As stocks have plunged and money runs out of them…it has to go somewhere. So it searches out the most beaten down assets out of any financial market: stocks, commodities, currencies, etc. It just so happens that the currency market has had two of the “safest” looking assets since these two currencies have been sold off for three years back to back.
Therefore as money ran out of stocks and commodities it found a place to “hide” within the U.S. dollar and especially the Japanese yen. This switch in sentiment from a “risk seeking” to a “risk aversion” mode has really helped out these two currencies as they have served as “defensive plays” out there in the market…away from the storm.
Now, once the tide finally turns and a bottom is in place in the stock markets and commodities finally stabilize, you will see money pour out of these two assets and back into higher yielding currencies like the Euro, British pound, Australian or New Zealand dollars, etc.
So as you can see, there’s always a place to turn to within currencies no matter what the other markets look like. No other market can boast that they can benefit in “boom times” and in “bust times”.
Therefore, I’d encourage you to consider adding in currencies to your portfolio. As you can see, if you had owned the yen and the S&P 500, the yen would have smoothed out much of the volatility to your S&P 500 index fund.
While everyone else is “crying the blues”, you would still be holding up just fine.
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Really Good Stuff….. I need things that will increase in when the S and P tanks.
Yep, and remember that the opposite “play” will likely unfold too when stocks stabilize…
In the past months it was stocks down, dollar and yen up.
Well, when stocks head up (and I think that process may very well be beginning now), then it may be dollar down (USD) and yen (JPY)down.
So that’s a forward looking idea that is playable too.
Will diversifying on currencies help me “hold my own” during these time? I do agree that other currencies besides the U.S. dollar might be experiencing better stability and are appealing. Any suggestions??
Yes, exactly! When stocks tank…the dollar and yen have been good to hold during those times. However, when stocks recover as they appear to be starting now, then higher yielding currencies (euro, pound, aussie dollar, new zealand dollar, etc.) will benefit noreso than the lower yielding U.S. dollar and yen.
So these other currencies (euro, pound, etc) mentioned above will likely prosper when the turn upward comes and that would help to boost your overall portfolio if you had these in your portfolio as the turn comes in the markets (which may be beginning now).
The U.S. dollar’s upside potential is limited if stocks don’t slide off further. For investors haven’t run to it for its superior fundamentals but because it was a defensive play during the downturn because it had been sold off for several years straight as the yen had too. Hope this helps.
How much time a day do I need to spend to really get a handle on the currency market?