Covid-19 and its impact on the Forex Market
Since the emergence of Covid-19 and its rapid spread across the globe, there has been widespread panic over how it will affect the global economy, even when considering how it has already wreaked havoc in several countries.
The Forex market, against all odds, when compared to other markets such as stocks and commodities, has however remained stable despite the global pandemic.
The Euro and the US Dollar are two of the driving forces in the Forex market and February 2020 saw value added to the Euro when concerns surrounding the global pandemic started growing, especially considering that Italy became the epicentre within a matter of weeks.
The largest impact Covid-19 has had thus far on the Forex Market has been on the volatility thereof with exchange rates versus the dollar seeing multiple 2% moves every week.
Forex traders have had to accommodate this in their trading strategies, especially traders with long-term strategies as they are unable to hold these positions for extended periods.
Is the Forex Market the global economy’s saving grace?
There is a lot of uncertainty surrounding the final impact and a total sum of the collateral damage caused by Covid-19, but how will the Forex Market respond post-Covid-19?
It is imperative to look at the reasons why the Forex Market will explode once Covid-19 is eradicated as it may tip the economic scales either in a positive or negative direction.
- The Forex Market is the largest market in the world
The Forex Market may very well be the reason why economies have not yet come to a complete standstill as there is still movement amongst the currencies. There is more than USD 5.3 trillion every day with a constant exchange in currencies.
- Weaker currencies will strengthen
A lot of countries have seen a decline in the value of their currency due to the temporary (and in some cases permanent) closure of businesses due to strict lockdown procedures that have been put in place in an attempt to curb the virus.
As business returns to normal, economies will start strengthening and weaker currencies will, in turn, strengthen and gain in value against the stronger currencies as well and that will see a lot of traders trading their own currency once more.
- A decreased Market Volatility
The volatility of the Forex Market increased significantly, and a lot of traders have trading strategies which allows for them to profit especially during these times of higher volatility than the market has seen in over 5 years.
A lot of traders, however, do not posses strategies for this level of volatility and the market may have seen a lot of these traders exiting the market as trading during times of high volatility is not suited for them.
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Post-Covid-19 may see these traders returning when market conditions have stabilized more, lessening the risk of losses that traders may incur.
- More traders may switch to day trading
The chances of market instability post-Covid-19 will result in a lot of fluctuation in price movements and a lot of traders may use this opportunity to use trading strategies that allow for them to quickly enter and exit trades.
Day traders who use methods such as scalping, position trading and swing trading, amidst others, will frequent the market more to take advantage of these price movements.
- An increased use of Hedging
Traders may make use of this more to limit the amount of funds that they stand to lose in a given timeframe by making multiple investments that have inverse price-action relationships.
Traders will use this to earn greater profits from their strengthening assets than what they lose from corresponding hedges by placing complimentary trade orders and by placing multiple orders in opposite directions.
As the exchange rates may fluctuate significantly post-Covid-19, a lot of traders may want to lock exchange rates in place at the point where they open a trade to avoid incurring losses should the exchange rate change.
- Chances of chaotic or sporadic trading may be increased
With market conditions unstable and in the process of stabilizing, there may be a lot of traders who abandon their trading plans in order to try and take advantage of market volatility as best they can. Learn more about forex trading for beginners.
Traders may start trading in a chaotic way without a solid, thoroughly tested strategy merely in an attempt to offset their losses without the chance of incurring more.
- Traders may rely more on safe haven assets
A lot of traders may not be very trusting towards market conditions and trading major currency pairs while things return to normalcy. A lot of traders may opt to trade safe haven currencies such as JPY and CHF as these are both known as refuge assets.
- A lot more traders may invest in Cryptocurrencies
Cryptocurrencies may see an increase in trade as it provides an even wider volatility than other currencies and trade can occur without the weekend gaps to which other currencies are subjected to .
- Inflation rates may increase
Large quantities of reserve currencies are generally held by central banks that operate under a stable government and these reserve currencies form part of Forex reserves which are used to maintain stability in that country’s economy.
As soon as the country’s economy sees a decline, the interest rates are reduced which causes a lack of interest from foreign investors in that particular currency. As soon as the economy is in such a position, inflation will increase along with the interest rates.The rise in interest rates rise, the attractiveness of the country’s currency will increase, drawing in more overseas investors.A lot of countries will see this process occurring due to declining economic situations, but once the pandemic is over, interest rates will rise once more and contribute to the influx that the Forex Market will experience.
Despite the havoc that Covid-19 has wreaked right around the world, and the effect it has had on other markets, the Forex Market is still the strongest, albeit the most volatile at the moment, but there are still traders who can benefit from this.
With the virus a thing of the past, the Forex Market, amidst the others, is set to explode with a multitude of traders who want to benefit from conditions returning to a more stable one, while others are counting on continuing volatile market for months to come.
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Despite the gains it may hold, traders are advised to follow the trading plan they have in place in addition to their trading strategies as swiftly moving over to others that they are not familiar with, on top of exposure to volatile markets, may lead to great losses.