The world of finance is an interconnected web made up of many kinds of market participants. Political events, central bank policies and environmental happenings can all affect how markets trade and traders need to be alert to all of the above in order to trade successfully.
However, as big as forex, commodity and bond markets are, and as much as they are connected to one another, it could be said that stock markets alone are the underlying driving force in the financial markets.
The reason for this is that stocks are the companies that drive our capitalist economy and it is they that are ultimately responsible for the things we buy and the way we live our lives. Because of this fact, stocks tend to be the leading indicators in markets.
By that, I mean stocks often move first before anything else. They often decline well in advance of recessions, they react first to important news outbreaks and they often indicate the best course of action for other traders to take.
It is at this point that forex traders should be most optimistic and look to buy some of the currencies that will benefit most from an upturn in the economy. High growth currencies from emerging markets such as the Brazilian Real or the Turkish Lira, are likely to do well during the beginning phases of a new bull market in stocks. As are those currencies that have dropped the most during the preceding bear market, the British pound, or the euro perhaps.
It's for this reason that earnings season can be just as important a time for forex traders as equity traders.
When stocks are expensive, it's likely that the bull market is in its final stage. Utility stocks and blue chips tend to be the only stocks making new highs and small cap stocks are starting to slide.
Whenever stocks are either expensive or due for a correction, forex traders should act to avoid those currencies that have moved up in tandem with stocks.
Higher growth currencies such as the Brazilian Real or Turkish Lira should be exchanged for the safety of lower yielding currencies like the Japanese yen, the US dollar or the Swiss franc. These three currencies are the main safe havens for currency traders and should be sought out whenever there are signs of stress.
However, as big as forex, commodity and bond markets are, and as much as they are connected to one another, it could be said that stock markets alone are the underlying driving force in the financial markets.
The reason for this is that stocks are the companies that drive our capitalist economy and it is they that are ultimately responsible for the things we buy and the way we live our lives. Because of this fact, stocks tend to be the leading indicators in markets.
By that, I mean stocks often move first before anything else. They often decline well in advance of recessions, they react first to important news outbreaks and they often indicate the best course of action for other traders to take.
When stocks are cheap
Stocks become cheap, generally, towards the end of a recession and after a decent bear market has taken place. During this time, corporate earnings have dropped substantially, economic growth has stalled and stock prices have shown signs of bottoming out.It is at this point that forex traders should be most optimistic and look to buy some of the currencies that will benefit most from an upturn in the economy. High growth currencies from emerging markets such as the Brazilian Real or the Turkish Lira, are likely to do well during the beginning phases of a new bull market in stocks. As are those currencies that have dropped the most during the preceding bear market, the British pound, or the euro perhaps.
It's for this reason that earnings season can be just as important a time for forex traders as equity traders.
When stocks are expensive
When stocks are expensive, it's likely that the bull market is in its final stage. Utility stocks and blue chips tend to be the only stocks making new highs and small cap stocks are starting to slide.Whenever stocks are either expensive or due for a correction, forex traders should act to avoid those currencies that have moved up in tandem with stocks.
Higher growth currencies such as the Brazilian Real or Turkish Lira should be exchanged for the safety of lower yielding currencies like the Japanese yen, the US dollar or the Swiss franc. These three currencies are the main safe havens for currency traders and should be sought out whenever there are signs of stress.
Editors’ Picks
EUR/USD: US Dollar to remain pressured until uncertainty fog dissipates
Unimpressive European Central Bank left monetary policy unchanged for the fifth consecutive meeting. The United States first-tier employment and inflation data is scheduled for the second week of February. EUR/USD battles to remain afloat above 1.1800, sellers moving to the sidelines.
GBP/USD reclaims 1.3600 and above
GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.
USD/JPY gathers strength to near 157.50 as Takaichi’s party wins snap elections
The USD/JPY pair attracts some buyers to around 157.45 during the early Asian session on Monday. The Japanese Yen weakens against the US Dollar after Japan’s ruling Liberal Democratic Party won an outright majority in Sunday’s lower house election, opening the door to more fiscal stimulus by Prime Minister Sanae Takaichi.
Editors’ Picks
EUR/USD: US Dollar to remain pressured until uncertainty fog dissipates Premium
The EUR/USD pair lost additional ground in the first week of February, settling at around 1.1820. The reversal lost momentum after the pair peaked at 1.2082 in January, its highest since mid-2021.
Gold: Volatility persists in commodity space Premium
After losing more than 8% to end the previous week, Gold (XAU/USD) remained under heavy selling pressure on Monday and dropped toward $4,400. Although XAU/USD staged a decisive rebound afterward, it failed to stabilize above $5,000.
GBP/USD: Pound Sterling tests key support ahead of a big week Premium
The Pound Sterling (GBP) changed course against the US Dollar (USD), with GBP/USD giving up nearly 200 pips in a dramatic correction.
Bitcoin: The worst may be behind us
Bitcoin (BTC) price recovers slightly, trading at $65,000 at the time of writing on Friday, after reaching a low of $60,000 during the early Asian trading session. The Crypto King remained under pressure so far this week, posting three consecutive weeks of losses exceeding 30%.
Three scenarios for Japanese Yen ahead of snap election Premium
The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.
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