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Stock market volatility has been crazy lately!

Stocks dropped 21% from May to October of this year. But most of that drop happened within two to three weeks. That means investors saw 20% of their investment wealth disappear in a matter of days.

Why the market scare?

It’s the dreaded European debt crisis that keeps infecting markets from here to China. And it’s about to get worse, according to the head of the International Monetary Fund (IMF), Christine Lagarde.

Fortunately, there’s something you can do about it (more on that in just a moment.)

IMF’s Lagarde Paints an Ugly Picture of 2012

On Thursday, Christine Lagarde gave some alarming comments about where the market is heading. She said, “the European debt crisis is growing to the point that it won’t be solved by one group of countries.”

She went on to say that countries had better work together or “there is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies that will be immune to the crisis.”

I couldn’t have said it better myself.

It’s just one more sign that the volatility to stocks will likely get worse before it gets better as we head into 2012.

So knowing this, I thought it fitting to tell you about two currency pairs that act as a great hedge against falling, volatile stock markets.

Buying one of these currency pairs can help take the sting out of your stock portfolio as this Eurozone crisis drags on.

USD/CAD Jolts Higher When Stocks Plunge

For instance, pairing the U.S. dollar with the Canadian dollar in the Forex market (USD/CAD) can protect you from a market like this.

The USD/CAD pair generally trades in the opposite direction of stocks anyway, but it really “lights up” when stocks take a huge hit. Check it out below.

When Stocks Start to Plunge…Buy USD/CAD

Please click here to view larger image

As you can see above, when the S&P 500 dives, the USD/CAD currency pair thrives.

So buying the USD/CAD in the Forex market is a great way to profit when stocks are diving. Those profits can provide a nice cushion for the rest of your portfolio.

Why does USD/CAD respond so nicely when stocks fall?

First, as a commodity currency, the Canadian dollar is very sensitive to economic conditions. So as stocks fall, the Canadian dollar falls. Secondly, the U.S. dollar tends to rally when markets fall apart, because traders run to the world’s reserve currency.

You can play both of these outcomes by buying the USD/CAD.

You see, Canada is a huge oil exporter. When economies are growing, countries demand more oil to fuel that growth. But when economies contract and stocks tank, countries don’t need as much oil. As a major oil exporter, that hurts Canada’s economy, and the Canadian dollar. That makes the Canadian dollar very sensitive to economic fears.

Right now, we have fears that the European debt crisis will spread to the U.S. and affect our economy even more. So when those fears hurt stocks, it also makes the Canadian dollar dive, and the U.S. dollar rally.

Buying the USD/CAD is the easiest way to profit off that.

USD/MXN is like “USD/CAD on Steroids”

The next pair is extremely responsive to sell-offs in the stock market.

In fact many times, it can “more than make up” for slide-offs in stocks because of the very exaggerated, quick moves that happen in USD/MXN (U.S. dollar vs. the Mexican peso) during those times. Check it out below.

Make Huge Gains when Stocks “Pay the Price”

Please click here to view larger image

Mexico exports a lot of oil too, particularly to the United States. So this makes the peso another very “economically sensitive” currency.

Why does USD/MXN move more than USD/CAD? Because Canada is considered a developed nation while Mexico is still considered an emerging market.

So when stocks start to pullback, traders grab their money and run from riskier emerging markets, much more so than developed nations. It makes the money-flow movements more extreme.

Therefore, if you’re comfortable with the more volatile, extreme moves of an exotic currency, then buying USD/MXN can be a great way to hedge your stock portfolio.

If you’re looking for a tamer version of this trade, buy USD/CAD when stocks fall.

Again either one of these pairs can help shield you when stocks start to crumble. These are two of the best ways I know to protect yourself when markets sink, and economies start to contract.

Even better, once you add in currencies to the mix, all of the sudden you don’t have to settle for the meager returns and harsh turnaround of your friends who trade only stocks.

Have a Nice Day!

Sean Hyman
Editor, Currency Cross Trader

P.S. This is really just the tip of the iceberg. There are many other currency pairs in the Forex market that can hand you serious profits whenever stocks start to slump. My buddy, Tom Gregory can tell you how to take advantage of these profit opportunities on a minute-to-minute basis – and still sleep like a baby every single night. For today only we’re giving our readers a chance to follow Tom’s best recommendations, at a significant discount. Click here for details.

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