What is Contagion in Markets?
Contagion
Forex Trading Glossary
Quick Answer: Contagion occurs when financial stress spreads from one market or region to others, often driving investors into safe havens.
What is Contagion?
Contagion occurs when financial stress in one market spreads to others. In forex, contagion can cause investors to dump risky assets globally, strengthening safe-haven currencies and weakening high-beta ones.
Contagion Triggers
- Banking crises: Insolvency fears spread through the financial system.
- Sovereign defaults: Concerns about one country raise doubts about peers.
- Policy shocks: Unexpected capital controls or currency pegs being removed.
- Market liquidity: Forced liquidations spill over into unrelated assets.
Stay Agile
Contagion can escalate fast. Reduce leverage, diversify exposure, and monitor cross-market signals.
Contagion Playbook
- Track spreads: Watch sovereign bond spreads and credit default swaps.
- Monitor safe havens: Rising demand for USD, JPY, or CHF signals stress.
- Assess correlations: Breakdown of normal relationships indicates forced selling.
- Communication: Follow central-bank and government responses closely.
Related Terms
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