Worried About Recession? Here's Your Currency Trade
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After the week just past, recession talk is on the rise. Here's how to trade a double dip, or a muddle through, using currencies.
If you could catch your breath amid last week's market turmoil, you probably picked up plenty of chatter about the odds of a recession. Rebecca Patterson, chief markets strategist for J.P. Morgan Asset Management, doesn't think that's the most likely scenario, but she has a way to trade the possibility.
Patterson told CNBC's Melissa Lee that the dollar has risen in each of the last six recessions, for two main reasons. Americans spend less, which pushes down the trade deficit, and "Americans get nervous. They want capital, they want money under the mattress. They bring it home" and repatriation helps the dollar.
"If we have a recession - that is not my base case, but I definitely think there's a real risk of it and we should think about it - I do want to be long the dollar," Patterson says. The question is what to trade it against. Mexico is particularly interesting, she says, because close to 80% of its trade is with the U.S. and it is a play on oil - nice because oil prices tend to fall during recessions.
On the other hand, Patterson thinks it's more likely that we will avoid a recession and muddle through. In that case, she says, "we could see some interesting buying opportunities." She especially likes the Singapore dollar for its strong ties to China and its low dependence on foreign capital flows, both of which would provide some protection against economic weakness. She recommends selling the U.S. dollar against the Singapore dollar at 1.21 with a target of 1.17 and a stop loss at 1.2425.
In technical terms, Todd Gordon, co-head of research and trading at Aspen Trading Group, says the Singapore dollar is nicely positioned to rise against the greenback. And Andrew Busch, global currency and public policy strategist for BMO Capital, notes that China's central bank just allowed its currency to rise at the fastest rate in three years.
You can watch the whole discussion in the video clip.
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