I’ve seen the dreaded “R” word rear its ugly head in a few choice financial columns that I loyally read. Not many; but enough to make my spider senses tingle a bit. Seems as if some feel conditions are beginning to line up in such a way to cause at least some thought be given to the issue of a possible recession in our business decisions. And my business is retail Forex trading.
When we talk about recession as currency traders we must discern the type of recession we are talking about. Most of the time we are looking at the economy of an individual nation or group of economically entwined nations. Rarely do you hear the term “global recession” mentioned, as this occurrence is rare due to the nature and vastness of the global economy (but not impossible). Generally speaking, if some countries economies are contracting, others are expanding to fill the void.
This puts us in excellent position as currency traders. Since a trade on the Forex market differs from stock trading in that, instead of buying or selling one equity, we simultaneously buy one currency and sell the other (or vice versa). Further, stock traders have special conditions placed on them in order to sell, or short, stocks that can be limiting and annoying at best. Conditions like higher margin minimums and the “up tic” requirement constantly nag and erode possible profits. Currency traders have no such requirements since every trade has a sell, or short, involved with one of the two currencies being traded.
Our objective as currency traders on the Forex market focuses on which nations are struggling with recession, and which nations will prosper from that struggle. If a nation’s economy enters a recession – sales recede, profits decline, jobs decline and price of goods decline. This also adversely affects national trade balances, research investment levels and venture capital, all of which are vital to economic expansion. When this happens, governments and financial institutions must free up credit and monetary supply by reducing interest rates; making the currency less attractive to investors. This switching from low interest currencies to higher interest currencies on the Forex market is also known as the carry trade. In carry trades, investors borrow currencies whose countries have lower interest rates, such as Japan and Switzerland, to buy higher-yielding assets.
On the opposite side of the situation will be countries benefiting from the situation. Their lower priced products see a surge in sales and exports which increase profits. Eventually prices will begin to climb to keep the high profit margins intact. In these countries interest rates will come under pressure and begin to climb in order to check inflation. The currencies higher rates are attractive to investors and become heavy with buy orders.
This is when the Forex market does it job in the global economy. If a countries currency becomes so attractive that it actually causes it to spike too high, that countries own population will spend their valuable currency in other countries due to the favorable exchange rate. We saw this in the US during this last holiday season. Many Europeans spent their currencies in the US because the exchange rate was so favorable for the Euro, Pound and Swiss Franc. This market reaction will eventually begin to balance everything out by causing opposite economic reactions.
While “global recession” does not appear to be looming around the corner in any sense; the US, as well as other nations could experience what is called a growth recession. Not true recession where the economies actually decline, but one where only the “growth rate” or “rate of expansion” of their economy declines or completely stagnates. Careful evaluation will be necessary to determine which currencies will benefit by monitoring not only interest rate moves, but also trade, manufacturing, commodity and unemployment figures as well.
While no one wants to see a recession on any level, it is an economic must for global balance. As retail Forex traders we learn to keep our emotions in check to survive the volatility of the market swings. We should also keep our loyalties in check as to our currency preferences. Remembering always that any economic recession is merely a trading opportunity in two directions – up for one currency, and down for the other. Our trading activity will actually benefit the struggling nation’s recovery from the forces causing their economic contraction.
Good Luck and Good Trading.
Source by Mathew Murray