Finance Space

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. Some currencies can actually benefit from “hard times”.

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 (click to enlarge).

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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Tags: Investing