Economic Cycle
Expansion · peak · contraction · trough — and where each currency fits
- Name the four phases of the business cycle and their data signatures
- Match cycle phase to typical CB stance
- Predict which currencies outperform in each phase
Economies don't move in straight lines — they cycle. Expansion lasts years. Peak feels invincible. Contraction surprises everyone. Trough feels permanent. Knowing where you are in the cycle is more useful than knowing the latest data point.
The four phases
Expansion: growth accelerating, employment rising, inflation building. CB hiking. Peak: growth max, inflation hot, CB hawkish but pausing. Contraction: growth turning, unemployment rising, inflation falling. CB pivots dovish. Trough: growth bottoming, deflation risk, CB cutting aggressively. Then back to expansion.
Higher-yielding currencies (AUD, NZD, CAD, EM) outperform. Risk-on regime, commodity currencies bid, USD often soft.
Safe havens (USD, JPY, CHF) outperform. Risk-off, high-beta sold, gold bid. Real yields matter more than nominal.
Why the phase matters more than the print
A single hot CPI in expansion = hawkish surprise, currency-positive. The same CPI in contraction = irrelevant (CB is already cutting). Reading data without knowing the cycle is like reading a sentence without knowing the language.
Inflation 4%, unemployment rising, PMI dropping for 3 months. Most likely cycle phase?
- Four phases: Expansion, Peak, Contraction, Trough
- Early cycle = high-beta currencies win; late cycle = safe havens win
- Phase determines how data is interpreted
- Knowing the phase > knowing the latest print
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