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How Forex markets have responded to the Coronavirus pandemic

The Coronavirus pandemic has had a significant impact on global economies, currency values and trading markets. All these factors have affected the Foreign Exchange (Forex) market significantly.

At the time of writing, the situation has improved in most countries with the rollout of vaccines worldwide. But it should also be noted that the pandemic has not yet wholly run its course, and further waves of infection plus new variants could cause more disruption to markets and economies generally.

Relativity theory

As the relative values of different currencies drive the Forex market, it's not possible for there to be an across-the-board downturn as one might see in, for example, the stock market. The FX market is about buying and selling money itself, and one currency will always be worth more than another. Success in Forex trading is simply about being on the right side of a given currency pair at the right time.

Certain currencies are always seen as a haven for investors in that they are widely used, tied to major economies and are unlikely to lose value significantly. While these have all undoubtedly taken a hit due to the pandemic, investors have tended to stick with them and have avoided gambling on more volatile currencies that could see a considerable drop in value or even risk failing altogether.

Due caution

One of the vital pandemic takeaways for investors has been to always proceed with due caution, looking closely at the underlying factors that affect current value. For new investors, this caution extends to checking at least one reliable Forex review before choosing a broker.

With many more people either permanently or temporarily unemployed during lockdowns, Forex trading has become a popular way of both making use of free time and making extra money. Unfortunately, this has also encouraged unscrupulous websites that prey upon the naivety of new traders. Reading the reviews on a trusted site like forexfraud.com will help you make a safe, informed decision about which broker and platform to use.

A changing situation

An important lesson learnt from the pandemic is that the situation can change very quickly indeed and that these changes can then continue to happen. Initially, the markets responded based on short-term emotional gauges, buying and selling based on immediate trends that may then falter or be reversed. That could be seen as a classic trader error.

As the bigger picture emerged, it became possible to assess long-term prospects. Still, even here, uncertainty meant that most investors flocked to traditional safe-haven currencies like the Yen, the US Dollar, or the Swiss Franc. Moreover, the pandemic represented a huge and unprecedented disruption of the usual market activity, meaning the usual data points, typical trends, historical figures, and market charts could not be relied upon in the same way. Instead, investors had to look at underlying economic trends as they happened in the real world in real-time to appreciate what was going on.

Economic downturn

In simple terms, we have seen mass unemployment worldwide, though some economies have fared better than others. As a result, interest rates have inevitably been affected. Also, government borrowing to stimulate recovery has impacted the value of individual currencies. However, as these recovery packages begin to take effect, faith in the relevant currencies has often been restored.

In some cases, the pandemic has acted in combination with other factors. For instance, in the UK, the Brexit question has arguably had as much impact on the pound's value as COVID-19. Despite avoiding the anticipated 'no deal' outcome, both issues look likely to adversely affect the value of sterling through the rest of 2021.

Brighter signs

In contrast, the Australian Dollar ended 2020 on a high, with the commodity sector thriving. The cornerstone of Australia's economy is the export of iron ore to China. As China has also seen a faster-than-expected economic recovery, Australia has also benefited. So long as trade agreements between the two countries remain positive, the Australian Dollar looks likely to stay strong.

The market is still unpredictable and highly volatile. Short-term surges and drops, often led by emotional decision-making, are still common. Although it's possible to make impressive short-term profits by successfully exploiting this volatility, the risks in attempting this are equally great. Most long-term investors are accordingly sticking with traditional safe currencies, despite the losses these have also suffered.

The pandemic taught investors to expect the unexpected and always to be prepared for the worst. Despite the turbulence of the last year or so, these are valuable life lessons that will continue to be emphasised for some time.

By Greg Smith

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