Published On: Fri, May 29th, 2020

Forex Markets: Broker Trends Are Driven By Stock Market Performances

U.S. stock markets continue to shrug off concerns related to the potential for negative economic effects tied to the COVID-19 pandemic and a significant proportion of this optimism seems to be based on geopolitical initiatives to restart economic activities in many parts of the world. Most notably, these reopening initiatives have been promoted by countries in some of the hardest-hit regions and global analysts are still divided on where these trends are likely to be headed for the remainder of this year. Unfortunately, when gauging the true economic efficiency of these reopening proposals, it is simply too early to make a real assessment of how all relevant effects will play out when making their influences felt in global financial markets. If we add to this the significant potential for uncertainty that could come as a result of renewed trade war tensions, recent rallies in stock markets look even more questionable. 

Trends in traditional asset correlations can be identified by selecting multiple assets classes and monitoring trend behaviors over various time frames. Price behavior in stocks and commodities will often have a direct impact on relative valuations in foreign exchange markets, which is why it is important for active traders to compare forex brokers and make trading selections that are based on the variety of asset instruments each entity makes available. As generalized volatility in the market continues to rise, it will be critical for currency investors to monitor potential changes in equities trends as a primary indication of where longer-term valuations are likely headed for the rest of 2020.

photo/ Gerd Altmann

In most cases, the performance of the U.S. dollar as a protective safe-haven asset is dependent upon generalized trend activities that are visible in the equities space. Broadly speaking, market trends have developed strong correlations in relative asset classes that have remained in place over long-term time horizons. Traders often use this information during the construction of theme-specific trading strategies, but this approach also has its limitations when trades are initiated in certain market environments.

When U.S. stocks rally, the U.S. dollar tends to decline. When equities fall, the greenback tends to be one of the market’s primary beneficiaries. However, recent increases in stock market volatility have called many of these traditional asset correlations into question. Moreover, we might now be seeing substantial changes in the underlying policy tone with respect to the value of the U.S. dollar in world currency markets. 

In the past, U.S. President Donald Trump has made it clear that his preferred position on currency policy included a weaker U.S. dollar as part of the equation for national growth. 

However, it should not be surprising to see recent alterations in this position, given the unprecedented destruction that the COVID-19 pandemic has waged on the global economy.

If we continue to see changes in global policy rhetoric, investors that rely heavily on traditional asset correlations as a way of establishing a stance in short-term currency positions could encounter negative trading surprises. Market reactions to government commentaries and official news releases have been quite forceful and dramatic during this COVID-19 trading period, so there is not much reason to believe that these broader volatility trends will be changing in the next several weeks.

For investors with a medium-term trading outlook (2-3 months), trend activities in stock markets can still work as a primary indicator of upcoming trends in world currencies. Over time, history has shown us that changes in policy rhetoric have had little influence whenever attempts have been made to create meaningful changes in global currency market valuations. As always, the dominant force in this trading environment will be the market itself (for better, or for worse). But, more than likely, we would need to see a dramatic decline in equities markets before we see a major reversal in the value of the U.S. dollar.

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