Know What Moves Currency Markets

05/26/2011 4:36 pm EST

Focus: FUTURES

Eric Viloria

Senior Currency Strategist, FOREX.com

The currency markets are closely tied to market news, economic data, and even other assets and factors at play outside of the FX markets. Eric Viloria tells what to watch and how to properly figure this into your trading.

As a trader, it may be easy to get “tunnel vision” and just look at the security you’re trading and those prices. But what outside of that market might you be looking at to get an idea of what else is going on in the markets?

Our guest today is Eric Viloria from FOREX.com. Eric, as a currency trader, what outside of currency do you watch to get a feel for what’s happening?

Well, there’s really a lot you can look at. Currencies are related to all other asset classes, whether it’s commodities, equities, or bonds/interest rates. 

So things to look at are going to be some of the economic conditions within the various countries of the currency that you’re trading, because that’s going to have an impact on the interest rates; what central banks are going to do.

You could also look at commodity pricing, because some of these countries that are dependent on commodities, if they’re exporters of these natural resources, that’s also going to affect economic conditions within that country, so that directly pertains to the currency as well. 

Or you look at the stock markets and see how investors are gauging risk.

I know that a lot of people watch oil and the Canadian dollar because Canada exports so much oil. Can one be a leading indicator for the other? If oil starts to rise, do I have some time to maybe buy the Canadian dollar?

I don’t know that one leads the other, but there certainly is a strong correlation there. 

As Canada exports oil, that is going to make up a portion of their GDP—net exports—and it’s going to contribute to that. If there is growth in Canada, that’s typically going to lead to a stronger Canadian dollar.

How much does news like a Middle East crisis or unrest affect your daily decision making and currency trading?

It can affect it a lot in the shorter term, so daily decisions certainly are impacted by these geopolitical events.  Although a lot of times it does happen to be “noise” if it is a political event rather than an economic one. 

Keeping an eye on these sort of gives you an idea of what to expect in terms of volatility. You don’t want to set your stop losses too tight when there’s a lot of tension in the Middle East and you can get whipsawed out, or you always have to pay attention to what your risk tolerance is in terms of profit potential. 

Looking at daily events that could cause more volatility in the markets is certainly important.

How do you combine that with technical analysis? If you’ve got something that is bouncing off a long-term support, but you’ve got news that may disagree with that to say that it may break through that support, how do you then decide which to believe?

Well it’s sort of tough there. I generally would like to see the two—the fundamentals and the technicals—be in line with each other, because when they diverge like that and you have conflicting signals from your technicals and fundamentals, usually I’ll just sort of stay away from a trade like that.

Is it a possibility to wait for confirmation? Is there anything you will do to get in the trade and take advantage of it regardless?

Yeah, you could look for a breakout. If it breaks below that support level and that sort of coincides with the news events that are happening, but you take a deeper look into it and see this is also going to impact some long-term fundamentals, then you could put a position on using those sort of indicators.

Related Articles on FUTURES