How does the coronavirus affect the foreign exchange market?

Today I am not here to talk about algorithmic trading or systems or tools. I would like to talk to you about something that is in the focus of traders in the last days and above all because it is an important issue because it affects the lives of many people.

As you know, if it affects people’s lives, it affects the economy and also, of course, the currency market. But, How does the forex market react in this environment? I tell you.

What is the coronavirus?

I’m sure you’ve already heard of it, but just in case, I’ll put you in context.

It’s about a virus that we can catch through the mouth, ears, nose and even the eyes and affects the respiratory system. The symptoms are: dry throat, coughing, sneezing, muscle cramps, respiratory problems, high fever and can be as fatal as kidney failure leading to death.

The virus that began in Wuhan (China) in December last month and has traveled through Japan, Thailand and now America. There are several hundred people infected and it has several deaths behind it.

How does the coronavirus affect the market?

Understanding history will help us understand the reaction of the markets in a similar case, keeping in mind that each circumstance is different from the previous one. The virus outbreak reminiscent of the SARS pandemic in 2002 and 2003 that killed about 800 peoplemost of them from China and Hong Kong, according to data from the World Health Organization.

SARS hit Asian currencies hard, in rates and actions from the point the infections were officially identified by the World Health Organization in February 2003 to the peak of new daily infections.

How many times have we said that what the markets like least is fear and uncertainty?

With this background, the investor keeps his portfolio and prefers to stay out of the market in the face of possible strong movements that affect him badly. This generates falls in global indices and greater volatility in the foreign exchange market.

The coronavirus and the foreign exchange market

To the point, Ruben. It is clear that due to the nature of the coronavirus, the currencies that are being affected the most are Asian ones.

The Japanese yen (JPY) is acting as a safe haven, just as it often does in times of economic uncertainty. That is why we can see in most crosses how it is being strengthened compared to the rest of the currencies.

The Chinese Yuan (CNH) is looking very weak and in most pairs we can see strong downward movements of the currency.

Also important is the Australian dollar (AUD), which due to its direct relationship with China is being negatively affected. This is because of Australia’s trade relationship with China. Any sign of slowdown or risk directly affects AUD.

What to do as a trader in the coronavirus case

It is impossible to predict what happens with x asset and establish clear rules to buy or sell in these situations. The ideal is, as we always say, to support you in profitable systems that have an advantage and manage them with connection and disconnection rules. The systems must be created considering already data or market scenarios with high and low volatility. That being the case, you should not have a problem when events happen. Manage your systems as if you were a clock and adjust your risk so that when volatility spikes it affects you as little as possible.

There are traders who prefer to be out until everything passes, totally understandable too. But remember that most of the time there will be some event that will generate uncertainty for you.

A hug and good trading!

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