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Two Protective Currency Plays To Make Ahead Of The Looming Recession (FXC, UUP)

September 23rd, 2011

Sean Hyman: There’s a hurricane headed for the U.S. economy, one that’ll  send stocks tumbling and rip gains out of your portfolios – especially if you aren’t ready with some protective currency plays.

The “hurricane” I speak of is the looming recession.

You see, the U.S. gross domestic product (GDP) annual growth rate has fallen for the past four quarters. The last time that happened, in 2008, growth fell to a negative rate for the following six quarters.


So when the rate of growth starts to slope downward, and then stays in place for a couple of quarters, you can bet a recession is on the way.

Much like no one can prevent a hurricane, you as an individual investor can’t prevent a recession. But you can calmly prepare for it well in advance, so you’re ready for the worst – and that’s exactly what we’re going to do.

How To Defend Your Portfolio

There are four easy moves to make now to protect your investments from the looming recession:

  • Get off of margin; make sure you own all of your investments outright without any margin loans paying for some of your stocks.
  • Take some profits and raise the level of cash in your portfolio.
  • Hold some defensive stocks that weather the storm better, like dividend stocks and big-name multinationals.
  • And, most importantly, add currencies to your portfolio that will prosper when the recession hits.

To find the best protective currency plays to prepare your portfolio for the inevitable economic mayhem, let’s look at what worked during the last dip in economic growth.

Two Protective Currency Plays for the Recession

When the U.S. GDP growth rate dipped into negative territory in the final quarter of 2008, it remained negative for all of 2009.

This hit Canada’s oil profits and did some damage to the Canadian dollar (NYSE:FXC) when it was paired with the U.S. dollar (NYSE:UUP), as seen in the accompanying chart. When the USD/CAD rises, it means the dollar is rallying, while the Canadian dollar is falling by comparison.The USD/CAD Recession Breakout

By buying the USD/CAD pair,  you can breathe life back into your recession-stricken portfolio. While everyone else is suffering, you’re sitting pretty with a nice hedge for the rest of your portfolio .

Along with buying the USD/CAD pair, you can also short a “currency cross” like the Canadian dollar vs. the Japanese yen (CAD/JPY).

Remember, the Canadian dollar dropped during the last recession. However, when recessions are in full swing, defensive currencies tend to “rule and reign.”

Above we paired the Canadian dollar against the defensive buck. In this second chart, I’ve shown what happens when the Canadian dollar is  paired with the defensive Japanese yen.CAD/JPY Follows Economies South

In fact, CAD/JPY is already starting to break down yet again. This month it started falling below a support line that it’s held for two and a half years.

Why is it doing that? It’s because the U.S. GDP has been slowing down for three quarters .

Remember, GDP trends are hard to reverse. Once an economic decline starts, it doesn’t quickly reverse.  So the chances that the next GDP reading gets closer to zero are very high.

Savvy investors realize this and start shorting the CAD.

So whether you’re buying USD/CAD or short-selling CAD/JPY,  make sure you’re preparing your portfolio for what’s to come. As economies shrink and stocks come crashing down, you’ll find that protective currency plays like the USD/CAD will help take the sting out of your portfolio.

Written By Sean Hyman From  Money Morning

We’re in the midst of the greatest investing boom in almost 60 years. And rest assured – this boom is not about to end anytime soon. You see, the flattening of the world continues to spawn new markets worth trillions of dollars; new customers that measure in the billions; an insatiable global demand for basic resources that’s growing exponentially ; and a technological revolution even in the most distant markets on the planet.And Money Morning is here to help investors profit handsomely on this seismic shift in the global economy. In fact, we believe this is where the only real fortunes will be made in the months and years to come.


NYSE:FXC, NYSE:UUP


 

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