- JP Morgan Chase picks four best currencies for recessionary hedges
- Singapore dollar least attractive
- Yen should form part of any recession hedge
According to JP Morgan Chase analysts, if an international or US recession is on the cards, the best bet is to own the Singapore dollar, Swiss franc, USD, and yen while avoiding emerging market currencies.
The analysts explained: “Recessions are when creditors get to ask for their money back.” That is why three of the four best currencies to park one’s money in during a recession are from nations with remarkably robust external positions.
The team said the Singapore dollar was the least attractive, while the yen offered the best price right now. The USD benefits because as the default international funding currency, most nations need to purchase back dollars when companies and banks deleverage during recessions.
The team called talks of a recession premature at this stage but conceded that it made sense to have contingency plans should trade tensions escalate further.
JP Morgan singled out emergency market currencies as particularly vulnerable during a slowdown. These currencies depreciate by 17% on average during a two-year period straddling the beginning of an economic recession.
The team added that during a recession, the NZD was the worst-performing currency by far among the G10 nations, losing on average between 7% and 17% of its value.
Although the yen has performed worse than the other three major hedges in the past, its real effective rate this time around is 23% lower than the 40-year average.
The bank estimates that it was 8% overvalued before the last three recessions. This is why the strategists believe it should play a central role in any recession hedge.
The bank also stated that the USD should be able to build on recent gains against the EUR after stronger economic results from the 19-country currency zone.