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'Defensive Currencies' May Enjoy Summer Bounce

By    |   Monday, 13 Jun 2011 08:19 AM

During the summer months, stocks and commodities tend to pull back.

Large institutional investors know this and so they are quicker to sell upon any bad news during those months.

And bad news is just what has been rolling in over the weekend …

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Two earthquakes hit Christchurch, New Zealand, over the weekend. (This is in addition to two others that they had just months ago that killed 180 people). They had a 5.5 magnitude quake hit followed by a 6.0 magnitude quake an hour and 20 minutes after the first quake. That shook up the New Zealand dollar in the near-term and helped out the greenback.

Then Japan’s machinery orders came in worse than expected at negative 3.3 percent versus plus 2.0 percent.

New Zealand’s home price index fell. Hong Kong's home sales tumbled.

China’s lending pulled back. Their economy continues to show signs of slowing.

And all of that was just one weekend.

I’m bringing out all of that to say this. Bad news is more apt to have a negative effect upon the markets in the summer months than in most of the rest of the year because more institutions will be quicker to hit the sell button than they would at other times in the year. (Hence the Wall Street saying, “Sell in May and go away.”)

Also, more bad news is more apt to happen during the summer months because many corporations experience a slowdown in their businesses then and so it’s easier for many of them to miss their earnings targets, which can cause their stocks to tumble.

Anything like this can give the defensive currencies a nice pop higher in the summer months much more easily than the rest of the year when there tends to be smoother sailing.

Typically the dollar, yen and Swiss franc all benefit during those times when bad news comes out and stocks slump. However, right now the Japanese central bank (and many in the G-7) want the yen to become weaker at these levels.

So that will likely give the franc and the greenback better pops higher when these negative news events happen than it will for the yen at these levels.

Another thing that could trigger some temporary strength for the dollar would be if oil fell below $95 a barrel and closed notably below $95. That would cause the uptrend on the daily chart of oil to be broken.

Many investors would take this as a sign that the global economy is slowing down again and that the demand is coming off of oil for the moment.

The same thing will happen if the S&P 500 cracks 1,250 and holds below it. The downside sell-off in stocks would likely pick up steam at that point.

So be watchful for any of these potential “triggers” that could cause a temporary slide-off in stocks, commodities, etc. During those times, the defensive currencies could take the lead.

In other words, trading the defensive currencies during those times in the summer months can help to take some of the sting out of a slumping stock portfolio at the same time since a stock slump causes a rally in the defensive currencies like the dollar and franc.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Money Matrix Insider. Discover more by Clicking Here Now.

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During the summer months, stocks and commodities tend to pull back. Large institutional investors know this and so they are quicker to sell upon any bad news during those months. And bad news is just what has been rolling in over the weekend …Jointhe 3.5% of...
sean,hyman,defensive,currencies
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2011-19-13
Monday, 13 Jun 2011 08:19 AM
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