Although the consensus for 2020 had been broadly positive, with economic activity expected to expand and as a result, flows should have moved outside of the United States to emerging markets, the first few days of the year look completely different, because of the rising tensions in the Middle East.
The currency market already had a reaction to the event and the most favored had been the Yen, due to its safe-haven status. This isn’t the first time we have frictions between nuclear countries, so there are a few things that forex traders must have in mind when making trading decisions.
#1 Understand facts, leave the noise aside
All the news media is touting about the start of World War III and how big this war with Iran will be. However, if we analyze things from an objective perspective, the odds of a major war right now are reduced. Wars start only when one of the camps is in a weak spot and right now, both the US and Iran can inflict pain on each other, pains that won’t justify all the resources necessary. Shortly speaking, both will have plenty of things to lose and few things to earn.
Tensions could remain elevated and we could see each side “flexing muscles”, but as traders we must understand the underlying information and not the noise in the media. Correlate breaking news with the currency reactions and you’ll see that most of the time, the market does not react meaningfully.
#2 Trade safe havens against weak currencies
We’ll use again the current situation since we’re all familiar with it. The yen had been the clear gainer from the last surge in Middle East tensions, but did it perform extremely well against all currencies? Since the Iranian general had been murdered, the USDJPY is down an aggregate 40 pips, with major spikes until the time of writing. AUDJPY, on the other hand, is down by approximately 200 pips. NZDJPY had a similar reaction. The trick is to find the currencies that will perform the worse and, in this case, commodity currencies are the weakest.
#3 Diversify and adjust risk management rules
Even though you are a FOREX trader, in times with geopolitical risks, it won’t be bad to diversify with other assets like gold. Gold is a huge beneficiary in these periods and it will also provide a way to diversify your portfolio. Even though market moves are higher, don’t forget that risk management is the most important thing to have in mind. Reduce your risk and trade cautiously.