Safe Haven Currencies Could be the Winners If Roubini’s Dire Prognostications are Right

It's a scary time for the world economy, Roubini told Bloomberg News this week, with a global recession and financial crisis likely in the next year due largely to the new 'cold war' that is brewing between the U.S. and China. 

This is good news for the Japanese Yen and the Swiss Franc but probably not for emerging market currencies or the risk-sensitive Australian and New Zealand Dollars. Commodity currencies like the Canadian Dollar may also suffer too, while the precious metals like gold could find themselves in demand. 

“I think it is a bit of a scary time for the global economy. There is a sharp slowdown in global economic growth. We went from an expansion to a slowdown, and I think there is a risk of a global recession and financial crisis by next year,” Roubini told his interviewer. 

Roubini, who was once affectionately known in the financial community as 'Dr Doom' because of economic forecasts made after the financial crisis, says a new age of rivalry between the U.S. and China is one of the main things underpinning his negative outlook.

The veteran economist says this will probably lead to a ‘cold war’ in the realm of technology and trade between the world's two largest economies. As a consequence, there will be a ‘decoupling’ between the two major economies and a more generalised trend toward a ‘deglobalisation’ or the ‘balkanisation’ of the world economy.

“We have now a global rivalry between the U.S. and China about who is going to be controlling the industries of the future: artificial intelligence, automation, 5G, and all the other major industries. It is not going to be easy to find a solution to this problem," Roubini says. "If this escalates there will be a global recession.”  

'Balkanisation' risks destroying the complex web of interconnected supply chains for multinational companies with dire global economic consequences. The trade talks currently underway between the U.S. and China are will probably fail in a few months time, Roubini says, with bilateral relations worsening even further afterwards. 

The fact the U.S. and China have just agreed a trade truce at last weekend's G20 summit in Osaka, Japan, is not enough to ease Roubini’s concerns about the outlook. Despite both sides agreeing not impose further tariffs on each other and to return to the negotiating table, Roubini says the relationship is doomed in the long-term. 

“In my view, this truce is not going to lead to an agreement on trade or tech. Then the tensions are going to escalate. Huawei has been thrown a life-line but they could pull the plug on Huawei any day,” Roubini says. “As it is right now no one is going to use the Huawei smartphone or the 5G networks because anybody who is going to use it today - tomorrow it might be a system which is not working. So the global business of Huawei has already been affected and semi-destroyed, not formally but informally.”

The other risk that could help tip the world economy into a recession is the worsening relationship between the U.S. and Iran, which could lead to a spike in oil prices and stagflation. 

Stagflation is lack of growth caused by high inflation such as that which might result from higher oil prices and technology goods that are increasingly expensive due to the global tech supply chain disruption. 

“Manufacturing is already in a recession globally,”Roubini says. “There has already been in the data a collapse of Capex. Once Capex is down, industrial production is down, employment is down, and you have the beginning of a global recession, that starts in tech, then in manufacturing, then in industry, and then goes to services. And we are seeing it in the data.”

As a result of Roubini’s dark prognostications, the Yen and Swiss Franc could easily find themselves in demand once into 2020, but most other currencies would be at risk of losses.