By Sean Hyman, Currency Analyst
www.worldcurrencywatch.com 

Good question, right? Especially right now as unemployment rises all over the world…

At last glance, Canada has 6.6% unemployment, the U.S. has 7.2% unemployment, the U.K. has 6.1% unemployment, and Japan has 4.1% unemployment.

Only Switzerland has managed to keep unemployment relatively low at 2.8%. (Anyone up for moving to Switzerland? Great skiing and employment – sounds good to me.)

So why do certain currencies seem strangely immune to these high unemployment numbers? And why are others suffering in the same predicament?

For instance, the dollar has been soaring right in the face of a 7.2% unemployment rate, while Canada’s currency, the loonie, is diving with its 6.6% unemployment rate. Meanwhile, why is the Swiss franc falling against the yen when it’s got a lower unemployment rate than Japan?

It’s Actually Quite Simple…

If this credit crisis was an isolated incident, and you could pinpoint a single country that had fallen on hard times, while the rest of the world was doing relatively well, then the currency with higher unemployment would probably be dropping in comparison with the rest.

But here’s the problem: You can’t. Right now, everyone is in the same boat, and no one really is immune to this global recession.

So instead, traders are rewarding currencies for other reasons. For example, the dollar is rallying hard, with one of the highest unemployment rates among major economies. That’s because all money managers and retail investors go into defensive mode during a global recession.

Learn How to Spot a Defensive versus Offensive Market

When the markets go into defensive mode, traders dive for the most beaten down currencies relative to all of the other major currencies of the world. They tend to buy up the low-yielding currencies and hide out until the coast is clear.

The two most beaten down major currencies in the world were the U.S. dollar and the Japanese yen when this mess began last year. Therefore, this was the logical place to run to because these currencies would likely fall the least and could possibly even rise.

Well, as it turned out they did rise, quite significantly actually. So it was a good move. 

However, when the good times return to the market, and offensive players come back out on the field, then traders will look for countries that are hitting on all cylinders. When that happens, unemployment numbers could once again make or break a currency’s value.

When this credit crisis dissipates, then fundamentals will be back in control rather than fear and panic. When that happens, the currency attached to the healthiest country will rule once again. However, Forex traders only care about whose sickly currency is suffering the least.

However, in the coming months to latter part of the year, you will likely see a sharp reversal out of these defensive plays. You’ll see traders take an interest in countries with the highest inflation, lower unemployment rates, etc. In other words, things will be business as usual once again in the Forex market.

But until then, you have to keep your defensive thinking cap on when you’re trading. Wait until these currencies that yield higher than the buck and yen finally break their downtrends. When that happens, the offensive players will join the game again.

Be watchful for this. Most will still be caught up in the former crisis theme and miss it when the game changes. Don’t be caught unaware. Be ready to act when the defensive players start to leave the field, so you can profit from the next big change.