Copyright (c) 2009 Jay Meisler
I wrote this article in October of last year and it still holds true today. I am reprinting it as the market continues to focus on stock market movements although not quite to the extent as during the height of the financial crisis.
Do you ever feel like you are a yo-yo being bounced up and down on a string? This is what it felt like this past week trying to trade the forex market off of stocks. New entrants to currency trading, probably think the forex market has always focused on equity movements. This is not true. In reality, since the U.S. dollar was floated in 1971, ending the era of fixed foreign exchange rates and ushering in the era of floating forex rates, there has generally been a very loose correlation between stocks and the dollar.
I remember many years ago, when I first started out in the 1970s in a bank dealing room (there were no screens then, all transactions were by voice brokers, telex or direct phone calls), the dollar had a brief period when it traded off the DJIA.. Since there were no screens quoting prices, one of the traders sat on the phone shouting out moves in the DJIA and we tried trading off of it. This worked for awhile but then the market lost interest and we looked for something else to key off.
There have been other times where the market became hyper-focused on one indicator, market or event and traded the dollar off of it. During the 1970s it was the monthly U.S. merchandise trade number that seemed to be the only economic indicator that mattered. In the 1980s, the forex market went through a period when all that seemed to matter was the weekly money supply figures on Thursday afternoon. In those days, the forex market became fixated on U.S. interest rates and often reacted to daily Fed open market operations (i.e. whether it add funds using repos or drained using matched sales) as a guide to its monetary policy bias. No one pays attention to this anymore. There were times when political events dominated. I remember when there was almost a daily rumor that the Russian leader had died. In those days you stayed glued to the wire services for the latest rumor. When he finally died, it was almost a relief to see the rumors end not get jerked around by what had become an almost daily occurrence. During the recent commodity boom, the eur/usd traded in a close correlation with crude oil. Lately it has been all about stocks.
In the meantime, expect the currency market to stay focused on stocks but if that market goes into consolidation and a range, which it could do after this panic driven collapse, the forex market might look for a new flavor of the day to focus on.
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Jay Meisler is a co-founder of
Global-View.com, the leading forex discussion site for more than a decade and where traders from around the globe come for the latest breaking news, flows, rumors and trading ideas =>
http://www.global-view.com
