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June 14, 2022

How To Make Money Trading In A Recession

Frank Cabibi

Global inflation, company layoffs, economic sanctions, geopolitical conflicts and so on have investors shuddering from the thought of investing. Volatility has picked up well beyond expectations as recession fears loom in the forefront of everyone's mind. With all these issues, it's hard to tackle markets when we have been so used to different monetary policy, risk-on sentiment and economic growth. As the FOMC meeting is just over the horizon, it is important to brush up on key concepts to help us prepare for market uncertainty. So, here are some ways to make money trading during turbulent market conditions.

Trade Risk-Off Pairs/Buy USD

What Does Risk-Off Mean?

Due to ever-changing market conditions, examples of risk-off pairs tend to change as well. Risk-off currencies basically are the ones that perform better in times of uncertainty, economic struggles, hawkish monetary policy or high inflation.

Here is a list of risk-off currencies that tend to do better in recessionary times:

  • USD
  • CHF
  • JPY

Historically, these currencies have been considered 'safe haven' investments when the economy is suffering. USD has always been a safe haven because of the Federal Reserve and their decisions impact the global financial market. Ever hear of people making Swiss bank accounts to shield their money (or keep it hush-hush)? The Swiss Franc is considered risk-off because of it expendability with debt. As a constantly profitable and small economy in the financial sector, the Franc never really gets into deep waters like Germany, United States, Canada, Euro-Area, etc. which are much larger economies. Lastly, when US stock markets fall, the yen tends to appreciate, making JPY a historically profitable play in poor economic conditions.

What Pairs Will Move Up/Down During A Recession?

Here is a list of all the risk-off major pairs that would perform well/poor if a global recession were to happen now:

Bullish

  • USD/CHF
  • USD/JPY
  • XAU/USD

Bearish

  • GBP/USD
  • EUR/USD
  • AUD/USD
  • NZD/USD

You might have noticed that USD/CAD is not on the list. That is because the Canadian economy has been very strong as of recent. Their jobs data is better than the US and most other countries while the oil-dependent economy has benefitted from sanctions on Russia and supply-chain shortages. Overall, if the energy crisis on oil continues, the loonie will persist, but if oil prices fall, USD will overtake CAD.

Because of the Fed's impact on the world financial system, USD will continue to be strong especially if it's central bank continues to raise rates like it has been doing so far this year. Gold is also on the bullish list because of its extraordinary circumstance. Due to reasons mentioned in this article about gold, we think a recession would be a good opportunity to start building positions on gold for the long term.

Making Money Trading In A Recession

The process of trading in a recession can either be through the use of short term or long term plays. GBP/USD and EUR/USD tend to follow the US stock market (SPX500 or NAS100). If you have ever traded these indices, you would know how volatile they can be on a regular basis. This volatile behavior is mildly reflected on the pound and euro when it is up against the USD, but the correlation is generally the same as the SPX500. If one was to trade GBP/USD or EUR/USD, quick short plays might be the best option. Ranging plays would also work, but there might be heavy ups and downs along the way.

All forex pairs enter into long-term swings either to the upside or downside. But, some pairs like to take exuberant amounts of time in a single direction before changing course. These pairs are AUD/USD, NZD/USD, USD/CHF & USD/JPY.

Similar to the pairs just mentioned above, gold is another example of an asset that takes a long time to move, allowing for investors to build large positions over time. Commodities like gold also tend to perform their best during economic declines.

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