The COVID-19 global pandemic has had a profound impact on just about every country, society and economy. At this point in time, this is one of the few certain observations that one can make.
Few individuals and few traders such far reaching and long lasting impacts. Yet with the situation in both Australia and abroad changing from day to day, it also seems unlikely that we’ve witnessed anywhere near the end of the impact of coronavirus on forex trading.
It was arguably only in the beginning of March when COVID-19 really made its mark on the capital markets around the world. Though it could be argued that the signs began to appear towards the end of February as corona-related deaths began to be reported in countries outside of China.
The negative economic impact was immediate and disastrous. International trade, travel, tourism and commerce ground to a halt and financial markets around the world experienced a crash the likes of which had not been seen for over a decade, since the GFC (Global Financial Crisis) in 2008.
The disruption to trade, the worldwide quarantines and locked downs, and the battering down of economies in just about every country on the globe was inevitably going to affect the entire market. Large corporations closed China-based factories, governments rolled out a variety of stimulus packages aimed at buoying their economies as best as possible and allowing business owners and labourers to keep their heads above water… as best they could.
It may still be early to analyse the long term effects of these emergency measures, but the chaotic volatility of the forex market over the last six months has been rather reflective of the tumultuous times.
The sharp volatility in the global financial markets, especially considering the bullish first two months of 2020, had most economists predicting a guaranteed global depression. Yet, while volatility in general does not bode generally very well for financial markets, once the dust settled, traders and sellers (who had initially been flocking to safer assets to hedge their bets and minimise their risk and exposure) began to revert to a bullish mentality again. Perhaps this was a result of a ‘bubble’ in overpriced tech stocks or perhaps this was merely a result of cash infusions, particularly in the US economy.
Nonetheless, the volatility of the market was here to say whether it be the equity, bond, commodity or foreign exchange markets. Even President Donald Trump’s Twitter-based announcement about his own positive COVID-19 result at the beginning of October sent the equities futures contracts reeling. Market liquidity was proving to be even more volatile and affected by day-to-day news and coronavirus-related announcements than previously thought.
Forex traders engage in currency trading on the decentralised global market of foreign exchange, which is not just the largest financial market in the world (with an average volume of trading over $5 trillion a day!) but it is also the most liquid.
Forex’s transition to what can be labelled a “COVID market” saw currency pairs experiencing extraordinarily fast and steep revaluations. Under regular circumstances, forex traders and analysts predict trends based on interest rates, inflation levels, international trade deficits and surpluses, capital market fluctuations and, of course, countries’ political developments.
In a COVID-19 era, the capital market fluctuations and political news in particular have been thrown into such disarray that the impact on forex markets has caused analysts to resort to methods other than simple data calculations and trend predictions.
New factors, which were developing at alarming rates, were becoming more and more relevant.
Around the world, more and more jobs were being lost as the true economic impact of the pandemic reared its ugly head. Fears that there is potential for even higher unemployment than during the Great Depression of the early 30s have not gone away.
The market reckoning of overleveraged corporate debt has not yet occurred as we have yet to emerge from this global emergency. Governments, in their efforts to insulate their economies, accumulated ever increasing debt. Much like the initial impact on forex trading and capital markets in general, the reflective impact of corporate debt by companies scrambling to survive has yet to manifest itself.
From the effects of tourism due to lack of travel to the decimation of the commercial real estate industry as more companies consign themselves to the reality of workforces working from home, these new long-term adjustments to the market have yet to manifest themselves fully.
The US dollar, as the global reserve currency, has seen rather sudden movements in its demand, though many market analysts predict that these movements are reflective of emotional trading rather than long-term calculations. The US dollar index is currently still lower than it has been in a year, thanks to steep drops in March, April and August.
The impact on forex trading due to restricted global trade and movement is likely to be extensive yet unpredictable. A good gauge though is to analyse the movement in the stock market as not only is it a strong indication of economic activity, but the forex trading and stock trading markets are connected in a number of ways.
Yet, recent activity has not quite been what many predicted. Recent months have seen a marked increase in trading across markets, platforms and commodities. Forex trading has since increased, not decreased, and at unprecedented levels.
Speculations for this include traders trying to make up for loss of jobs and income, remote working freeing up traders to spend more time and effort on trading, or the migration towards larger forex brokers in a desperate bid to find solace and safety in the shade of larger market participants. Whatever the reason, the substantial increase in forex trading is unusual for the industry, even if it is linked somewhat to the same increase in stock trading activity.
The sheer volatility and unpredictability of this year’s world events has already made its impact in the short term in financial markets and economic snapshots, and has given plenty cause for concern for the long term. Whether the increase in trading activity is a last nervous flutter before an even greater plunge or indicative of a long, hard yet positive move towards recovery remains to be seen. What is clear is that the impact of the coronavirus on forex trading has been truly astonishing and the twists and turns don’t seem to be coming to an end any time soon.
If you’re interested in forex trading yourself, whether you’re new to the game or an old hand, make sure to get in touch with our team at Global Prime about our range of forex products.