COVID-19 Crisis and Volatility in the Forex Market

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The COVID-19 pandemic that has the world firmly in its grips is taking a terrible toll on all aspects of our lives, economy included. Experts were predicting a recession as soon as the news of how serious the disease was started coming from Wuhan back in December.

The South Asian and Australian markets were the first to show signs of distress. European markets were next, as the news of countries like Italy and Spain being hit the hardest by the new disease.

The European Central Bank (ECB) was quick to announce a €750 billion aid package aimed at relieving some of the worst effects the pandemic had on the EU economy, but that didn’t do much to ensure investors’ trust. The UK was next. The government’s slow reaction only made the situation, already fragile because of the Brexit, worse. The value of pound sterling took a nosedive, prompting grim prognoses about the future of the United Kingdom once it leaves the EU zone.

Forex Market

The governments’ intervention did have a moderate impact on the market, but couldn’t stop the slide. On March 9th, we saw what is now being called the Black Monday. In one of the largest single-day slumps, markets across the globe collapsed, fueled by the Russia – Saudi Arabia oil war.

Dow Jones lost 1,800 points at the opening of Wall Street. But that wasn’t the end.

Three days later came Black Thursday and we saw the largest Us stock market crash since 1987. Then came Black Monday II, on March 16th, with equally disastrous events.

The crisis still continues, and at this point, it is hard to see the end.

Those familiar with the history of the forex market know that this isn’t the first crisis it has weathered. In fact, going back to the Bretton Wood Accord, signed in 1944 that established the foundation for the modern forex trading as we know it today, there have been quite a few of them. That doesn’t mean that the situation isn’t serious and some measures will need to be taken if the trading is to continue.

Forex market across the pond

Perhaps the worst pandemic response in the world happened in the United States. The richest country on the planet, with most resources at its disposal, bungled COVID-19 crisis worse than a drunken sailor his salary during a port stay. President Donald Trump, faced with thinning chances of reelection come November, tried to use the virus as a tool to attract more of right-wing voters.

As we can see now, that plan backfired spectacularly, resulting in more than 100,000 deaths, 20 million unemployed, and Donald the farther from his second term in the White House than he ever was.

Fortunately for the United States, this still hasn’t endangered the dollar’s status as the world’s reserve currency. The current Sino-American feud has seen many investors reducing their exposure to Chinese markets, opting for the US ones instead. It remains to be seen if that is a long-term occurrence, though.

Why the volatility?

The forex market has been very sensitive to the ebbs and flows of domestic economies, all of which have been badly hit by the pandemic. The novel virus has wrought havoc on them, forcing shutdowns and lockdowns. While some industries may even benefit from those, allowing their employees to work from home and reducing cost and improving efficiency in the process, others haven’t been so lucky.

Restaurants and hotels, as well as the entire tourism sector, have been particularly badly hit and it will take years, if not longer, to recover. As national economies struggled to create a proper response to the new realities imposed by the coronavirus, their currencies reflected both their successes and failures. This has resulted in a volatile forex market, with the dollar, yuan, euro, yen, and other currencies changing value dramatically. And that is just the type of opportunity forex traders live for.

There is plenty of space for speculation and profit, something that the forex market has been sorely missing in the previous period of stability.

Psychological effects

In Japan, individual forex accounts have risen from ¥403.1 trillion in February to ¥1,015.6 trillion, more than doubling in value. These accounts are owned mostly by middle-aged salarymen, who traditionally do their trading in the evenings after work.

However, the COVID-19 pandemic has caused them to deviate from this pattern and more and more of them are trading during office hours. The reason is that many of them were working from home and were able to log in their forex accounts without fear of their boss or colleagues seeing them.

The fact that yen was gaining value also added fuel to this brushfire, since Japanese traders like to sell yen when it is high and take a position in other currencies. This makes you wonder if the Japanese were breaking strict workplace etiquette, what were other, less disciplined nations, doing?

The answer is the same. With so many people working from home, the total volume of forex trading sky-rocketed. The opportunities for quick glances and maybe a trade or two during the office hours were just too tempting for many part-time traders.

COVID-19-driven market

While pandemic didn’t have a catastrophic effect on developed countries and their currencies, the developing part of the world hasn’t been that lucky. All the challenges these economies were facing before the pandemics are still present, vastly compounded by problems caused by the virus.

Since the first rule of forex trading is not to lose money, many traders are staying clear of these currencies in their daily trades. They are simply too unpredictable and only the most experienced traders will dare venture their capital in trades involving them.

Perhaps the best strategy at this time would be to stick to what you know and play it safe. After all, there are plenty of opportunities for making a profit without reaching for obscure currencies.

The future of forex market

As investors are facing a bear market, there aren’t many commodities that can offer refuge in these volatile times. This has forced them to turn to the dollar, despite all the measures Trump’s administration has taken that should have disastrous effects on the greenback’s value.

How long this will last is hard to predict, but at the moment, it is creating some interesting opportunities in forex trading. What is important is to keep bias away from your decision-making process and evaluate potential trades with a cool head, not your heart. While you may be tempted to buy a currency just because you are partial to it, it is critical that you resist that temptation and judge the potential of any trade solely on its own merit.

Just because you wish something will happen doesn’t mean it will.

The increased volatility of the forex market has, ironically, spurred the traders into action. In the last few years, the market was fairly stable and the volatility introduced by COVID-19 has created opportunities for profits that haven’t been seen in a long time. It is no wonder that we are seeing a significant increase in trade volume all over the world. More and more people are taking the notion of this and interest in careers in forex trading is very high. For some of them, especially those forced to stay at home, trading may be one of the rare opportunities left to create an income.

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