5 Reasons Why 'Cash Is King' During a Recession

What Does ‘Cash Is King’ Mean？

“Cash is king” refers to the perspective that cash (currency) is more valuable than stocks and bonds in terms of acquisitions. A phrase like this is often used when securities prices are high or volatile, and investors decide to hold on to their cash and wait for the market to stabilize. 

Investing in Currencies during Recessions

In the investment world, the individuals who endorse the phrase “cash is king” during recessions make good arguments for doing so! 

Financial instruments like stocks, crypto, and equities often lose their purchasing power during recessions. Since their returns dont keep up with rising inflation, thus, over time, these investments may result in negative long-term returns. 

In contrast, when it comes to forex trading, given that a trader trades two different currencies, also called currency pairs, he will be assured that at the end of the cycle, there will be a profit from one of the currencies. 

For example, if UK inflation is relatively higher than other countries, you would expect the Pound to fall in value since it is becoming relatively uncompetitive and fewer people will buy British products. Moreover, the time value of money makes a strong dollar worth more today than it is tomorrow. The best way to invest cash is to invest it where there is a return equal to or above inflation, rather than leaving it idle.

Learn what are the Best Currency Pairs to Trade to increase your profit potential. 

1. Cash Means Liquidity

A recession carries with it the fear that individuals will lose their jobs and that their bills will become unaffordable if they dont save money. With a solid cash balance in your pocket, you can navigate uncertain times with a lot more confidence knowing that you are financially prepared for anything that comes your way. 

Keeping cash available, particularly during recessions, adds flexibility to any wallet. 

An additional advantage of trading forex over other financial instruments is that, ideally, “cash is king during a recession” effectively summarizes the benefits of having liquid assets on hand when the economy becomes unsteady. Cash can be leveraged in a number of ways to improve the financial position of investors, from weathering rough markets to taking advantage of discounted investment opportunities. 

A large part of the reason why investors increase cash in their portfolios during times of financial uncertainty is because of this specific reason. Read Forex Trading During Recession for a comprehensive approach to taking advantage of economic downturns. 

2. Interest Rates are on the Rise

The global economy is going through a unique period. In recessions, inflation is often lower or even deflation occurs. However, in the US, due to ongoing supply chain issues, our economy is grappling with a four-decade record high of 8.5%. This has prompted the Federal Reserve to raise interest rates in an attempt to combat inflation. A higher interest rate on debt means a higher interest rate on savings accounts and money market accounts.  

Interest rates make the forex world go round! 

Global interest rates determine the forex market. The reason for this is that high-interest rates force consumers and businesses to borrow less and save more, reducing economic activity. Loans just become more expensive, while sitting on cash becomes more appealing. Since currencies rely on interest rates for global capital movements into and out of a country, investors use interest rates to make investment decisions. 

Higher interest rates increase the likelihood that a countrys currency will strengthen. So, in forex trading, you buy currencies with higher interest rates and sell those with lower interest rates to increase your profits. 

3. Volume of Assets 

In comparison with stocks, the forex market is enormous, which is a significant difference. It is true that the stock market offers limitless opportunities, but it cant compare to forex, which trades around $6.6 trillion every day.  

Forex can spice up your Portfolio Diversification 

A forex portfolio comprises a variety of currency pairs originating from different parts of the world. Your portfolio will be less risky if you have more currency pairs in it. However, correlations between the pairs forming the investment, as well as the time frames involved, should be taken into account. It is common for forex traders to focus on a few major pairs, such as EUR/USD, USD/JPY, GBP/USD, and AUD/USD, since these pairs are relatively stable.  

There is about $200 billion worth of trades per day on the Forex market, dwarfing all global stock markets combined. Large trading volumes can be beneficial to forex traders in several ways. As a result of high volumes, traders will be able to get their orders executed as quickly and as affordably as they desire. Markets are all susceptible to gaps, but with increased liquidity at each price point, forex traders can enter and exit more quickly. 

4. Foreign Currencies act as an Inflation Hedge

As the forex market behaves differently during recessions than other asset classes, it is an excellent tool for inflation hedging.   

During recessions and economic crises, for example, the stock market tends to fall in value. There are, however, many different forex pairs in forex trading, each of which reacts differently to the performance of the economy. When an economy slows down or inflationary pressures increase, currency pairs belonging to a stronger economy will likely gain value, while those belonging to a weaker economy will likely lose value.  

While foreign currency investment can be an effective hedge against inflation, what currencies investors pick to trade determines largely their success. If you want to hedge against inflation successfully, you should invest in currencies of major economies, since these currencies are better protected from fluctuations in exchange rates. 

The three most popular safe haven currencies (and their related safe haven investments) to hedge against inflation include the US dollar (USD) and US Treasuries, the Japanese yen (JPY) and Japan`s government bonds, and the Swiss franc (CHF) and Swiss government bonds. 

5. Currency as a form of Investment

The use of foreign currency can be an effective way of diversifying your portfolio during economic downturns.  

In the past, the idea of investing in foreign currencies seemed exotic and uncertain to many people, but today it seems that a surprising number of investors are turning to alternative investments, like foreign exchange, to reduce their exposure to increasing volatility in the stock and cryptocurrency markets.  

Forex Investments are done for the purpose of making money on currency price fluctuations. Basically, it‘s like trading stocks. When you buy a currency, you hope that it will increase in value so that you can sell it one day for a profit. By investing in currencies, you can earn profits based on an exchange rate, which is the ratio between one currency’s value and that of another currencys value.  

The US dollar is often regarded as a safe haven by foreign currency investors. So, they sell their other currencies to buy the US dollar, which automatically increases its value. Because US dollars are considered safe, and many people use them, they remain in high demand despite low-interest rates. It is important to remember that the strong US dollar is simply a reflection of weakening currencies worldwide.  

Moreover, investing in forex currencies can be very cost-effective (brokerage and commissions). Get to know the potential forex trading costs to make the most cost-effective foreign currency investments.  

Disclaimer: This post is from Aximdaily and it is considered a marketing publication and does not constitute investment advice or research. Its content represents the general views of our editors and does not consider individual readers personal circumstances, investment experience, or current financial situation.