- The US yield curve has inverted for the first time since 2007 in a flight to safety.
- The ominous sign of a recession is weighing on stocks.
- Some currencies are set to win and some to lose.
It has finally happened – The US 10-year Treasury bond yield is lower than the 2-year one – an inversion. History shows that when long-term lending is cheaper than for the short-term – a recession follows. The best indicator is the ratio between 10-year bonds and 3-month bills, but the 10-year / 2-year is close enough – and the trend is clear.
The main reason for recession fears is the US-Sino trade war – despite the recent tariff delay. The spat has been going on for over a year and has impacted investment and other business decision. While markets tend to exaggerate – talk of an upcoming recession can turn into a self-fulfilling prophecy.
For forex traders, the question is – which currencies are set to benefit and which to lose?
We will start with the losers
1) British pound – yield curve inversion also in Brexit-land
Brexit remains uncertainty as the government strives to leave with or without a deal by October 31st. However, the hard evidence already shows that the economy contracted by 0.2% in the second quarter and an outright recession cannot be ruled out.
Moreover, the UK yield curve has also inverted, showing that not only hard data points to a recession but also bond markets.
2) Euro - Germany is on the verge too
Germany's economy outperformed its peers thanks to imports to China – buoyed by a weak euro. And when the world's second-largest economy is struggling due to trade wars, the euro zone's largest economy is suffering as well.
The German economy contracted by 0.1% in the second quarter and stagnated on a year on year basis. Moreover, Berlin is hesitating about opening its purse strings despite a deep negative yield on German bonds. Investors are paying the locomotive money to lend it funds.
And when the locomotive is derailing, the whole train – the eurozone – may crash.
The euro may suffer less than the pound due to Brexit.
3) USD – in the middle
Despite the yield curve inversion, the economy is still outperforming many of its developed-world peers. It expanded by 2.1% annualized in the second quarter and job growth remains robust.
Moreover, America is usually in the driver's seat when it comes to expansion – and also recession. "If the US sneezes, the world catches a cold" – goes the old saying which remains true also in this case. If the global economy suffers a downfall, the world's largest economy will likely be the one to climb back up.
Nevertheless, the US is not the safest of safe-havens.
4) Yen – the ultimate safe-haven currency
The Japanese yen has proven to be the ultimate safe-haven currency – rising even when Japan suffers. When the nation suffered the horrific earthquake, tsunami, and nuclear disaster of March 2011, the currency leaped and central banks all over the world collaborated to bring it back down.
And as recession fears are on the agenda, Japan's economic growth recently beat expectations – rising by 0.4% in the second quarter – only a tad behind the US.
5) Bitcoin – Rising faster than the yen
Can digital assets be compared to currencies issued by central banks? We will leave the argument to another article. More importantly, many brokers offer BTC/USD as part of their portfolio and traders can benefit from its high volatility.
Bitcoin leaped when China devalued its yuan and dropped when Trump announced a delay in some tariffs. It is becoming a safe-haven asset – call it a currency or anything else.
When the economies suffer, there are always assets that fall with it and ones that win. Buying Bitcoin against the British Pound may offer the best reward. Always trade with care.
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