Why trading is tricky right now?

By Giles Coghlan, Chief Currency Analyst at HYCM

Trading the FX markets is frustrating right now. Markets are starting sessions risk-on only to finish risk off by the end of the day. It is a repeated pattern to see. It is like the risk-on and risk-off switch is broken. Understanding why that is might help deal with these markets.

The two main stories driving the markets at the moment are in conflict with each other. Let’s call them the ‘happy days’ and the ‘sad days’ narratives.

The happy days narrative

Growing up I loved a program that was shown in the UK called ‘happy days’. It was about a group of young friends having a fun time and enjoying ‘happy days’ together. The character I always most loved was the Fonz. He was effortlessly cool and though he rarely did anything of note, just being the Fonz was enough. With the Fonz, everything was going to be alright. On the show, he only had to appear and the audience cheered. Well, this is like the market happy day’s narrative and the Fonz is a bit like the Fed. With the Fed, everything will be just fine. As soon as the Fed acts to add stimulus to the US economy, the world cheers. Furthermore, the happy days (‘risk-on’) narrative is supported by the expectations that a vaccine is coming by year-end or early 2021. The Fed will fill any gaps with extreme stimulus measures, and life will carry on as before. Happy days and risk on. However, there is also the ‘sad days’ narrative.

The sad days narrative

Another program I enjoyed as a child was ‘He man’. In He-Man his arch-nemesis was Skeletor. An embodiment of death and destruction. Well, this is a bit like the market’s sad day’s narrative. Covid-19 cases are rising and the US is in a second wave, and will this not result in further shutdowns and job losses? Sad days. So, this is what the market is torn between. Sometimes the market focuses on ‘happy days’ and the Fed (risk-on) other days it is future job losses and rising COVID-19 cases (risk-off). Please note, however, that the hope of the Fed’s stimulus program is what is constantly allowing markets to keep rising. US stock markets are now trading at a high P/E ratio largely due to Fed stimulus hopes.

The key questions to ask?

Trading these two different narratives means that there are certain questions to keep asking yourself.


- Are deaths a better gauge to COVID-19 seriousness rather than infections?
- Or are hospitalisations the real mark we should be focusing on?
- How close are we really to a vaccine?
- Are the ‘second waves’ in South Korea and Australia more concerning than in the US?
- Will re-openings carry on, albeit at a slower pace, or will they stop
- Is the virus actually airborne and do droplets hold in the air for hours? If this is the case then it proves greater problems for the re-opening narrative.

You can see now why the market is choppy. So, in times like these, wait for the clear narratives to develop before frittering away your cash.

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