How the Coronavirus has impacted Forex trading
As stock market begins to regain its losses as 2020 continues, many Forex traders are thriving.
The Coronavirus pandemic has had a profound impact on the financial world, including on Forex trading. Global markets have crashed, and a worldwide recession is consequently looming. Currently, global markets are trying to recover, but will this trend continue?
Levels of demand are changing in different countries
Demand for currencies is changing across the world due to a multitude of factors, including unemployment, reductions in interest rates, and governmental action that impacts industries – mainly travel, tourism, and hospitality.
In terms of Forex, China and Australia were the first companies to be impacted by the virus, due to the virus’s alleged origins in China, and Australia’s position as China’s biggest trading partner.
As the virus spread throughout the world, and Spain, Germany, France, Italy and the UK saw their death tolls rise, investors began to favour the US dollar, believing that this was a more stable option, due to the Federal Reserve’s willingness to provide as much liquidity to the market as possible.
Furthermore, the US is less reliant on external demand, compared to Europe, Africa, and Asia. The dollar has historically been seen as the ‘currency of last resort’, which gave it some security in terms of investment in the currency. However, this hasn’t lasted long.
Due to increased strain on the dollar from, for example, health services and investors, the US is heading for an inevitable recession. This will impact the success of the recovery of the global economy.
However, Forex traders are taking advantage of the market’s volatility
Market volatility (the likelihood of the price of securities changing in a short period of time) was low during 2019. This, in turn, led to a tough year for Forex traders due to the reluctance of many to engage in the trade of online currency. This led to low trading volume, and therefore low trading revenue.
However, as the stock market begins to regain its losses as 2020 continues, many Forex traders are thriving. The rapidity of the changes in the market has caused a high trading volume (due to high volatility), and high trading volumes mean high revenue.
The pressure on global currency markets will continue for quite a while, but as long as volatility stays high, there is a clear opportunity for Forex traders to reap the rewards from their risky manoeuvres.
As industries begin to re-open, especially in Europe, investors’ confidence in the market should start to return. With this confidence, trading levels should continue to increase.
Forex trading levels have increased hugely in Africa during the pandemic
Since February 2020, Forex trading in Africa has increased by around 477%. This is due to several reasons:
• People have been confined to their homes and have therefore had more time to research and play the currency market.
• Forex trading, due to its speed, has low transaction costs which may be helpful for African traders with low capital.
• African currencies have begun to stabilise, and some are performing well against the US dollar.
What can we expect from the Forex market when life begins to return to normal?
It’s hard to predict exactly what will happen in the Forex market throughout the remainder of 2020 and in 2021. Second, and even third, waves of Coronavirus across the world could further impact the already volatile global markets.
For the time being, volatility will likely remain high, maintaining a high trading volume. However, with uncertainties around the US presidential election, Brexit, and the future of the European markets, Forex trading remains quite risky for the time being.
However, with the impending global recession forecast, there will be potential for currencies to rise. Therefore, it should still be possible for Forex trading to be profitable come 2021.
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