Market analysis

Trading major currencies: recession update

By Paul Reid

09 October 2023

In this article, we will cover Exness opinions alongside reporting from The Wall Street Journal, a commercial partner of Exness.

Forbes columnist Bill Conerly writes that he still believes the US economy is heading for a recession in late 2023 or the first half of 2024. He points to a number of factors, including rising interest rates, restrictive Federal Reserve policy, and tight lending standards.

Fortune also reports that Oxford Economics is forecasting a "rolling recession" in the US, predicting two consecutive quarters of negative GDP growth in late 2023 and early 2024. The firm says that the recession could be caused by several factors, including the Fed's aggressive interest rate hikes, high inflation, and the ongoing war in Ukraine.

Another strong indicator of a nation’s economic health and stability is the Gini coefficient. Ranging from 0 to 1, the higher values indicate greater inequality within the population, while 0 indicates perfect equality.

Right now the Gini coefficient for the US is at 0.41, much higher than other developed countries. Denmark leads the way with a score of 0.24, while the Gini overall average among a list of ‘developed’ countries is 0.30. In other words, there is a significant gap between the rich and the poor in the US. A strong sign of a crumbling economic infrastructure.

Another challenge is the national debt. The US national debt is currently over $30 trillion, equivalent to over 120% of GDP, and could pose a risk to the US economy in the future.

So how should major currency pair traders react? Even with such a gloomy outlook, shorting USD might not be the way to go.

Despite forecasts of a coming recession, internal political conflict, high interest rates, and rising inflation, Bloomberg reports that the US dollar index, which measures the value of USD against a basket of six other currencies, hit a 20-year high on 9 October 2023. USD seems to be unbreakable.

USD could continue to trade strongly, even in the event of a recession.  It’s sometimes referred to as a safe haven currency, meaning that investors tend to buy it in times of global uncertainty and economic turmoil. If the US does fall into recession, the whole world will likely follow.

The US housing crisis of 2007/2008 spread to other countries through the global financial system. Many European banks had invested in US mortgage-backed securities, and when the value of those securities plummeted, European banks suffered heavy losses.

If all central banks are go into crisis once again, USD could maintain superiority in the Majors basket, no matter the depths of the recession, so don’t blindly click the Sell button until you’ve made a full fundamental and technical analysis.

To get a more in-depth report on where USD is heading, read what the Wall Street Journal had to say about a declining inverted yield curve.

An Inverted Yield Curve Is Chilling. Imagine an Un-Inversion.


One of Wall Street’s favorite recession predictors—an inverted yield curve—is getting less inverted, but that isn’t all good news for investors. How the curve un-inverts matters, too.

Since July 2022, the chart plotting interest rates on U.S. Treasuries of different maturities has been downward sloping—with yields on shorter-term bills and notes exceeding those on longer-term securities—known as an inversion of the yield curve.

That is the opposite of the normal pattern. There is generally more inflation and interest-rate uncertainty over the long term than in the short term, so bond investors tend to demand a higher yield to lend for longer.

But over the past 15 months, investors have been pricing in higher interest rates and economic risk in the near term, lifting yields on the short end of the curve above the long end. That dynamic has historically been a reliable recession indicator—an inverted yield curve has preceded every U.S. recession since the 1950s. According to Dow Jones Market Data, inversions of the 2-year and 10-year yields—the most commonly cited pair—have preceded recessions by as little as seven months or as much as two years.

In early July, the 2-year yield exceeded the 10-year yield by nearly 1.1 percentage points. It was the largest spread between the two yields since early March, in the wake of the failure of Silicon Valley Bank, and close to levels last seen in the 1970s and 1980s.

Today that spread is down to 0.29 points. The 2-year yields 5.07% and the 10-year yields 4.78%. Elsewhere, the curve has already un-inverted: The yield on the 30-year Treasury bond is 4.94%, above the 3-, 5-, and 10-year yields. The six-month Treasury bill now has the highest yield on the curve, at 5.58%.

It matters how the yield curve un-inverts. That can happen in two ways, after all—either the 2-year yield falls more quickly than the 10-year yield, or the 10-year yield rises faster than the 2-year yield. Either pattern results in a steeper yield curve. The former dynamic is called a bull steepener, while the latter is more ominously named a bear steepener.

In a bull steepener scenario, markets are typically pricing in imminent interest-rate cuts by the Fed, prompting a sharp fall in near-term yields. That is often right before a recession.

By contrast, today’s bear steepener is driven by continued economic and labor-market resilience—pushing up longer-term yields as investors price in a higher-for-longer interest rate posture by the Federal Reserve. (The Fed’s ongoing quantitative tightening and a flood of Treasury issuance have also played a role.) That means more restrictive financial conditions, higher interest rates for borrowers, and more competition for other assets such as stocks. Those, in turn, raise the odds of a weaker labor market and recession.

“The overall effect of this bear steepening will be to jack up the net interest expenses of U.S. non-financial firms,” wrote Tan Kai Xian, U.S. analyst at Gavekal Research. “At such a cyclical juncture, higher net interest expenses will weigh on U.S. corporate profits, spurring bottom-line-focused firms to fire workers.”

Individuals and businesses tend to borrow over the long term—think of a 30-year mortgage or a 10-year corporate bond—while holding their cash in short-term instruments. So a bear steepening means their interest expenses on borrowings rise faster than their returns on cash equivalents, increasing net interest expenses. That is a drag on the economy.

Periods of bear steepening are much rarer than a bull steepening.

“Most often, [bear steepenings] occur at the start of an economic cycle, as growth is picking up,” wrote Jonas Goltermann, deputy chief markets economist at Capital Economics. “When the yield curve bear steepens while already inverted (as it is now), it is usually near, or at, the start of a recession. Generally, that has been followed by significant falls in long-term government bond yields, as well as equity indices.”

In other words, this bear steepener may still become a bull steepener, should a recession scare increase Wall Street’s appetite for long-term Treasuries and prompt the Fed to cut short-term rates. That won’t happen without some economic and stock market pain.

Trade major currencies and other top assets with the Exness Stop Out Protection feature and reduce the risk of stop out caused by volatility.

This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.


Paul Reid
Paul Reid

Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.

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