You ask, which 4 Currencies to Trade During a Recession

If you are a currency trader and have backed the USD since the turn of the year, you would have made some great returns.

With the aftermath of Covid19 and the energy crisis enveloping the whole global economy, most economists and commentators are predicting difficult times ahead, with increased interest rates and a shrinking of GDP.

It looks certain that we are heading for a recession, how do we define it, it has mixed interpretations.

A recession is a significant decline in economic activity that lasts for months or even years. Experts declare a recession when a nation’s economy experiences negative gross domestic product (GDP), rising levels of unemployment, falling retail sales, and contracting measures of income and manufacturing for an extended period of time.

Official Recession Definition

During a recession, the economy struggles, people lose work, companies make fewer sales and the country’s overall economic output declines. The point where the economy officially falls into a recession depends on a variety of factors.

In 1974, economist Julius Shiskin came up with a few rules of thumb to define a recession: The most popular was two consecutive quarters of declining GDP. A healthy economy expands over time, so two quarters in a row of contracting output suggests there are serious underlying problems, according to Shiskin. This definition of a recession became a common standard over the years.

What to trade?

If we are traders, we can look for opportunities whatever the economic situation.

Investors worried that a global recession is looming should ditch emerging market currencies and stock up on the Swiss franc, Singapore dollar, U.S. dollar, and Japanese yen, according to JPMorgan Chase & Co. (JPM).

Several financial commentators have cautioned that the risk of a global trade war is rising and that this turn of events could push the U.S. and global economy into a recession. In a research note, reported on by Bloomberg, analysts at the bank responded to these warnings by examining historical trends over the past five recessions to determine which currencies are best to own when economic activity declines significantly.

JPMorgan described talk of a recession as “premature,” yet conceded that now is a good time to review contingency plans, given that trade tensions between the world’s leading economies are escalating.

Recessionary Hedges

“Recessions are when creditors get to ask for their money back,” JPMorgan analysts wrote in the note in which they identified the Swiss franc, Singapore dollar, U.S. dollar and Japanese yen as the best recessionary hedges. “Three of the top four currencies to own during a recession are those of countries that boast extremely strong external positions.”

Of the four currencies that the analysts described as recessionary hedges, they were particularly bullish about the U.S. dollar. The greenback, they said, is the world’s default funding currency, meaning that the rest of the world must buy U.S. dollars when banks and companies deleverage.

The U.S. dollar has appreciated in recent months as trade tensions escalate, and JPMorgan is confident that the currency will continue to outperform in the current environment.

According to JPMorgan, the yen is currently the cheapest hedge as its exchange rate, after adjusting for relative inflation and trade flows, is 23% below its 40-year average. The analysts added that the currency was 8% overvalued ahead of the past three recessions.

The Singapore dollar was deemed the least attractive of the four currencies named.

Avoid Emerging Market Currencies, New Zealand Dollar

In the note, emerging market currencies were described as particularly vulnerable to economic slowdowns. Based on JPMorgan’s calculations, this basket of currencies fell on average by 17 percent over a two-year period starting at the beginning of recessions.

Analysts also warned that some G10 currencies are known to struggle during periods of global economic decline. The bank claimed that the New Zealand dollar is “by far” the worst performer, adding that the currency loses an average 7% to 8% in times of recession.