Forex Investment and Currency Trading

Recent policy measures appear to have helped reduce fears associated with a collapse in the global financial system. However, forward looking indicators of growth continue to indicate that the global economy is slowing sharply and that the risks are for a recession in G10 space and slower global growth overall.

The market has also been making that important transition. Investors are starting to focus more on the “winners and losers” from a significant global slowdown. It is both important and hard to try to identify FX crosses that best express this theme.

From a fundamental perspective and looking at different macro shocks, growth risks remain most pronounced in G10 countries (especially in places like the US, Japan and New Zealand). On the other hand, economies like Brazil and Malaysia appear better shielded growth-wise when looking at typical macroeconomic shocks.

On a TWI basis, cyclical deceleration has supported currencies like the USD and the CHF in the past as well as the CNY and the EUR (but less so). On the other hand, the TRY, BRL, CLP, IDR, AUD, CAD, ZAR, SEK and KRW tend to weaken as the global economy decelerates. Interestingly, the global cyclical impact on the JPY or the GBP TWI has been more limited in the past.

On a single cross basis, a global slowdown tended to benefit only the CHF (vs the EUR), the CNY (vs USD) and CEE4 currencies (though with much less significant sensitivity). The funding pressures in the CEE4 currencies are likely to reduce the effect of this historical pattern. More broadly the USD would benefit in the past vs. most key crosses. On the other hand currencies like TRY, BRL, CLP, IDR, ZAR, KRW, AUD and CAD would depreciate during a global slowdown vs the USD.

For example the dollar and the swiss franc appear to be among the consistent outperformers at times of a global slowdown and current trading patterns appear to confirm it.

On the other hand, commodity currencies (like BRL, CLP, ZAR, AUD) and open emerging economies (like TRY and KRW) appear to be sensitive to slower growth. Finally, the current JPY strength appears to be more consistent with the broader effects of global deleveraging than with a cyclical trading pattern of the past.