If history has proven one thing about market downturns, it’s that stocks, the investment of choice for most retail investors, take pretty severe beatings. That means that equity-based mutual funds will follow suit and depending on the depth and breadth of the market collapse, bonds and commodities may join in on the fun, or lack thereof. With so many asset classes vulnerable during glum markets, what’s an investor that wants more than tiny interest rates offered by money market accounts to do? The forex market may be just the solution that weary stock and mutual fund investors are looking for to get back in the game.
Not Afflicted With The Same Cold
When the stock market starts to turn down, the process can be slow to start, but when the bears really want to growl, rest assured, they will growl. Typically, the downturn will start with one sector and then, like a case of sniffles through a kindergarten class, the next you thing you know every sector is infected and even the good stocks are falling, leaving investors running for cover, but finding little in the way of protection.
We’ve already talked about how this impacts mutual funds, often times the largest holders of the biggest stocks that are being sold off, but commodities bear markets are similar. Take the bursting of the commodities bubble in 2008. Nearly every commodity under the sun had soared to the moon through the latter half of 2007 and the first half of 2008. Then the party came to a crashing end and all the guests were booted out the door. Again, there was literally nowhere for investors to hide, unless they wanted to put their money into low-yielding alternatives like money markets and CDs.
That’s the great thing about forex. While the market for one currency may be bearish, you can bet other currencies are thriving. In fact, that’s what we’re doing when we trade forex pairs. We’re exploiting one currency’s strength over another or if we’re going short, we’re taking advantage of currency’s weakness compared to one of its rivals.
Where To Turn When Other Markets Head South
This is kind of a tricky question to answer because the answer depends on what markets are spiraling down. Investors may think that if US equities are retreating that it may time to short the dollar. That’s inaccurate. History has shown that foreign currencies that are viewed as “risky” compared to the US dollar, such as the Euro, British Pound and Australian and New Zealand dollars actually suffer when the US stocks fall. This is because international investors are seeking safe havens to invest in, and the greenback is safe haven number one. The Japanese Yen is number two on the safe haven currency destination list.
Another way to play currencies during market downturns is to look at the performance of commodities, namely oil and gold. The Canadian dollar is what is known as a commodity currency and the commodity it is tied to is oil. Simply put, there is empirical evidence to suggest that when the price of crude oil falls, so does the Canadian dollar. The Canadian dollar (aka “loonie”) follows oil, so if you see crude prices tumbling, the loonie won’t be far behind.
Yet another commodity downturn worth watching for is gold. The Australian dollar is intimately tied to gold prices, and just as we would short the Canadian dollar when oil prices decline, we would look at shorting the Aussie dollar as gold prices retreat.
Is Forex The Ideal Hiding Place?
Well, that all depends on your tolerance for risk. To be sure, the forex market can spike in volatility when other markets are collapsing. The advantage of investing in forex during market downturns is that the fundamental factors that can negatively impact stocks and commodities are absent in the forex market. A currency isn’t going to be taken to the market woodshed because of glum earnings reports, lost market share, failed acquisitions or selling by institutional investors.
Likewise, commodities can be affected by input costs associated with drilling or mining for or growing the product. Then there are geopolitical factors like political uprisings and wars that can impact commodity prices. Yes, these can impact currencies as well, but it’s highly unlikely a major currency like the pound or dollar would be severely hampered by political turmoil.
In many ways the aforementioned factors make forex a great place for investors to park their money when they’ve been chased out of stocks and other asset classes. No, you’re not going to get the safety of a money market account, but without taking a little bit of risk, it’s hard to reap any rewards. And when markets are trending down, that can be the best time to embrace the risks of investing in forex.
Article Source:http://www.articlesbase.com/currency-trading-articles/forex-investing-friend-or-foe-in-tumultuous-markets-1599702.html
