July 2010 was a big month for global stock markets, they rallied from the lows from the first day of the month. The European sovereign debt crisis is no longer front page news and that particular crisis appears to have passed for now. However in the last week, stock markets have paused again as employment growth and economic growth in the US show little sign of acceleration.
If you wanted to speculate on a recovery, what would be the best way of doing this? Similarly, if you thought another recession was on the cards, how could you trade this?
The forex spread trading markets could be a good way to play the recession/recovery. During the credit crunch there was one currency pair that acted as a guide to the global economy and that was the Australian Dollar/Yen (AUD/JPY).
Not only does the Australian dollar rise thanks to higher commodities demand, it also forms part of a popular ‘carry trade’. The carry-trade is where speculators borrow Japanese Yen which has low interest rates and then buy Australian dollars which have high interest rates. The speculator then makes a profit on the difference of the two interest rates.
As confidence rises, this carry-trade boosts the AUD/JPY currency pair, but if things turn sour, the pair can violently reverse.
Nevertheless the AUD/JPY offers a way to speculate on the recession/recovery because it may accentuate any trends in the underlying global economy. For those investors who are trading shares, note that the AUD/JPY pair has closely correlated with the S+P 500 over the last few months. The S+P 500 is a Stock Market Index of the top 500 US companies and therefore a good guide as to how the US economy is coping with any global problems.
You can speculate on the AUD/JPY pair through margined FX, financial spread trading and CFDs.
If you think the World economy will recover, put simply, you could speculate on the AUD/JPY pair going up. If you think the World economy will falter, and even slip back into a recession, then could speculate on the AUD/JPY pair going down.
Margined FX, financial spread trading and CFDs carry a high level of risk to your capital. You can lose more than your initial investment. They may not be suitable for all investors. Only speculate with money that you can afford to lose and ensure you fully understand the risks involved. Seek independent financial advice where necessary.
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