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Trading the News In A Changing Market

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Published: 06Aug2009
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Retail traders love “trading the news” while professionals tend to wait for the dust to settle after news comes out and for spreads to narrow to normal as liquidity returns. In any case, trading the news used to be pretty straightforward, expect a positive reaction to “good” economic news and vice versa for “bad” economic news.. However, we live in t topsy-turvy world that has been turned upside down by the worst financial crisis and economic downturn since the Great Depression. The goal of this article is to highlight how markets have changed and how trading the news is no longer a clear cut affair.

The current global market is being driven by bouts of risk appetite and risk aversion. The swings between the two are often driven by economic news and measured by how stock markets react. Positive equities are viewed as an increase in risk appetite and lower stocks are seen as a rise in risk aversion. This has led to volatility in the forex market as the risk pendulum swings in both directions. In addition, the focus on equities is not as intense as it was during the global financial crisis where forex traders reacted to every tick in stocks during the period of heightened risk aversion. As a result, there have been periods where these intermarket relationships have tried to decouple but seem unable to make a break..

This has made it difficult to trade the news as the forex market reaction to economic news has become more complicated. Typically, a rise in risk aversion favors the jpy and dollar at the expense of commodity currencies and other pairs. On the other side, a rise in risk appetite generally has the opposite impact, selling of the jpy and dollar and buying of commodity currencies and others. The eur/usd is even more complicated as sometimes it leads but more often than not seems to lag due to movements into and out of euro crosses. This also forces those traders who are used to trading the news the old way to avoid a gut reaction to sell dollars on bad economic news and vice versa. There is also the decision as to whether to react by trading the dollar outright or via crosses but this discussion is for another article.

Take last week’s U.S. employment report as an example. The dollar started the week on a weaker note but had regained some ground (jpy as well) ahead of the monthly employment release. The report showed non-farm payrolls declining more than expected. The market anticipated a rise in risk aversion from this report and this saw commodity currencies and others fall both vs. the dollar and jpy. Stocks fell throughout the session and this kept the dollar and jpy bid vs. other currency pairs. . The reaction in the market to news tells more than the news itself. A typical reaction to “good” or “bad” news tends to support a trend. On the other hand, the ability to shrug off positive news or withstand fallout from negative news can send a clue as well to the strength of a trend. In the case of the employment report, the market reacted to negative news in a typical manner.

As with any news, the prevailing trend must be taken into account when anticipating how the market might react. I call this playing by the market “rules.” What I mean is if the market is buying dollars on good news and vice versa on bad news, then expect the market to react this way. If the market is selling dollars on positive news then look for this type of reaction rather than hoping for a return to times when the market reacted in a logical manner. In other words, the market is telling you what “rules” it is currently playing by and will tell you when the rules change

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

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