I’m not here today to talk about algorithmic trading or systems or tools. I’d like to tell you something that is in the focus of traders in recent days and especially because it is an important issue because it affects the lives of many people. As you know, if it affects people’s lives it affects the economy and, of course, the currency market. But how does the forex market react in this environment? We’ll tell you…
I’m sure you’ve heard of Covid, but just in case, let’s discuss. It is a virus that we can catch through the mouth, ears, nose, and even the eyes and affects the respiratory system. Symptoms are dry throat, cough, sneezing, muscle cramps, breathing problems, high fever and can be as fatal as kidney failure leading to death.
It seems that there is a consensus and that the virus started in Wuhan (China) in about December 2019 last month and has traveled through Japan, Thailand, and now America. There are several hundred people infected and he has several deaths on his back.
How Coronavirus Impacts Markets
Understanding history will help us understand the reaction of markets in a similar case, bearing in mind that each circumstance is different from the previous one. The outbreak of the virus is reminiscent of the SARS pandemic in 2002 and 2003 that killed some 800 people, most of them from China and Hong Kong, according to World Health Organization data.
SARS had a significant impact on Asian currencies, in its rates and actions from the point where infections were officially identified by the World Health Organization in February 2003 to the peak of new daily infections.
How many times have we already warned that the markets least like fear and uncertainty? With this background, the investor keeps his portfolio and prefers to be out of the market before possible strong movements that affect him in a bad way. This leads to falls in global indices and greater volatility in the foreign exchange market.
Coronavirus and the Currency Market
To the point, Ruben. It is clear that because of the nature of the coronavirus the currencies that are most affected are the Asian ones. The Japanese yen (JPY) is acting as a refuge, as it usually does in times of economic uncertainty. That is why we can see in most crossings how it is being strengthened with respect to other currencies. The Chinese yuan (CNH) is looking very weak and in most pairs, we can see strong movements down the currency.
Also important is the Australian Dollar (AUD) which, due to its direct relationship with China, is being negatively affected. This is because of Australia’s trade relationship with China. Any signs of slowdown or risk directly affect AUD.
What to Do As a Trader
It is impossible to predict what happens with active x and establish clear rules for buying or selling in these situations. The ideal is as we always say to rely on cost-effective systems that have an advantage and management with connection and disconnection rules. Systems should be created by already contemplating data or market scenarios with high and low volatility. That being so, you should have no problem when events happen. Manage your systems as if you were a watch and adjust your risk so when the volatility is triggered it affects you as little as possible.
There are traders who prefer to stay out until everything happens, fully understandable as well. But remember that most of the time there’s going to be some event that’s going to create uncertainty for you.