Sometimes watching forex markets is like watching a field of wheat in the breeze: it sways back and forth with little net movement as with a metronome. Today would be one of those days. It was clear from the outset that forex markets were watching the meetings in Europe, specifically between Sarkozy and Merkel to find out what the two leaders were willing to do to shore up periphery governments and economies in the European Union. The short answer was basically nothing.
What Movements Were Visible in Forex Markets and Where Were Those Impacts Felt
It truly is amazing to see how fast foreign currency markets move and the impact those movements have on global major indexes. For example one would think the DJIA would be a deep enough / large enough asset that it would not be influenced by factors outside Dow component business fundamentals – yet that is not the case. On a frequent basis one need only watch the market movements in the foreign currency cross rates of a selected basket of currencies and (more often than not) a pattern will emerge as to what the prevailing US stock market movement will be on a given day. Today was just such a day.
As I turned on my trading monitor today I watched markets (sometime after market open – 10ish EST as I recall) showing a strong risk on pattern in the forex markets. The DJIA was down in the neighborhood of 110 points and I made a call on risk on pattern. Sure enough as the day wore on, the DJIA crawled back within a hair or break-even leading up to the conclusion of the European Summit between Sarkozy and Merkel.
How the Forex Market Turns Risk Off
So the market had been waiting for Merkel and Sarkozy to issue their statements after their meeting (shortly after noon EST), and wouldn’t you know it, the forex market reversed, HARD. WHAM! WHAM! WHAM! WHAM! The riskon pattern was completely wiped off by a riskoff pattern – and sure enough, the DJIA tumbled, at one point more than 160 points – far below earlier lows. Then a strange thing happened – after the initial THUMP of the forex markets turn, the charts became mixed – not unlike fresh and salt waters in an estuary. The DJIA halted its slide and somewhere around 2:15 the pattern had flipped positive and markets resumed their climb back toward even for the day.
Now it’s about 2:45 and all signs are appearing to show riskoff again. It’s like the forex market simply can’t make up its mind, and is taking global equities markets on a rollercoaster ride. This sort of up and down activity is what necessitates a binary options hedging strategy in the first place. Equities markets are the whipping boy of the forex markets. Just imagine – more than 3 trillion dollars transacted on a DAILY basis in forex markets. That’s like turning over the entire output of the US economy every 4 or 5 days. Transacting this kind of volume of money on no actual underlying activity has been going on for decades, but that doesn’t mean it’s a good thing. Not by a long shot.
(Author note: for the record, the DJIA closed smack dab in the middle of the “double” zone on a binary options hedge based on the forex market signals today).