The forex market is driven by risk aversion, but to measure risk aversion, it’s necessary to look at factors outside the FX market, such as stock indices and the equity market volatility index (VIX).

However, as warned in "Rational fear and the forex market" (Currency Trader, March 2009), you must be wary of flaky and unreliable intermarket correlations. You should never trade a currency pair based on something going in another market. For example, you shouldn’t buy the Euro/dollar pair because oil is going up or sell gold because the dollar is going down. This is called "sticking to your knitting" — trading the market in front of you, not some dimly related security.

Having warned against putting too much faith in watching other markets, conditions are nonetheless extraordinary today. Just about everyone in every market is making decisions based on risk aversion or risk appetite, and talking about them in those terms.