Is a New Normal on the Horizon for Forex Trading?

With more than $5 trillion worth of transactions daily, forex is the largest and most actively traded market in the world. It is around 25 times bigger than the global equities market. It is also larger than both the stock and bond markets combined. However, is currency trading still worth your time considering the disruptive effects of COVID-19?

The pandemic has sent the global economy to an unprecedented downturn. It has resulted in millions of job losses. It has devastated the investment and financial markets. All of which contribute to changes in the foreign exchange market and the way investors profit from it.

The COVID-19 impact

On March 9, the New York Stock Exchange suspended market-wide trading temporarily as S&P 500 fell by 7% because of the coronavirus scare. The same adverse effect hounded the forex market. On the same day, the US Dollar Currency Index (DXY), dropped to the 95 level from over 99 in February.

This foreign currency exchange movement is not surprising given how serious the developments were on that day. The global markets reported major contractions as the WHO was about to declare COVID-19 as a pandemic. Also, a messy oil price crisis was rearing its ugly head. March 9, 2020 went on to be dubbed as a “Black Monday, ” alongside the Mondays from 1929, 1987, and 2015 which saw significant market crashes.

The coronavirus drag on the forex market is inevitable owing to the pressures all sectors of the economy are experiencing because of the enforced lockdowns or community quarantines. These restrictive measures limit economic activities not only in terms of retail sales and services but also in vital industries such as transportation, tourism, recreation, and even infrastructure construction.

Wilson Leung, a market strategist, offers an analysis that dissects the ways the pandemic has deeply affected foreign exchange trading. “COVID-19 is having a profound impact on financial markets and forex trading, and will continue to do so for a long period of time, ” Leung says.

Leung believes that the crisis has made forex trading even more volatile or fast-changing. Before, market charts and projections on interest rate scenarios were reasonably reliable. Foreign exchange analysts can use them to come up with fairly good predictions. The onset of COVID-19 and the recession that came on its wake, however, make it necessary for analysts to go beyond the usual data points in examining the drivers of exchange rate fluctuations.

Erratic currency movements

Forex is the world’s largest and most liquid financial market, and cash is traditionally known as a safe haven investment just like gold. However, some investment advisers argue that cash has become less palatable since interest rates fell to almost zero during the 2008 global economic crisis. Returns on cash investments have been declining recently because of the inevitability of interest rate cuts.

During economic difficulties, central banks tend to lower interest rates in an attempt to stimulate economic activity. Lower rates promote borrowing and investing, especially by businesses, which means more money is injected into the economy. This in turn facilitates growth.

In the investor’s perspective, higher interest rates are preferable. “In most cases, when a country raises its interest rates, the country’s currency gets stronger in relation to other currencies as assets are shifted away from it to gain a higher return elsewhere, ” says in a market research by Regal Core Markets. The pandemic and recession double whammy is making higher interest rates unlikely, though.

Still, the demand for currency, especially the US dollar, appears to defy expectations. One of the notable reasons for this is the rising unemployment figures. According to Leung, the extremely sharp increase of unemployment that resulted from the lockdowns leads to increased demand for the US dollar. Many investors still see the US dollar as a safe haven asset.

It’s still too early to decide whether or not this growing demand is good. The movements in US dollar demand, Leung says, are based on short-term gauges, which do not take into account the effects of long-term factors such as massive government borrowing.

Is investing in currency worth it?

The answer to this question is most definitely yes. Stephen Thomas, Associate Dean at Cass Business School in Dubai and London, believes that cash has been suffering from an overblown and prolonged underappreciation. “In today's low inflation world, it might be a hidden gem in your portfolio, ” says Thomas. The finance professor adds that benchmark interest rates may be nearing zero, but these should be the least of people’s concerns.

It can still be rewarding to engage in forex trading as well as in forex derivatives trading. “There are many benefits to trading [foreign exchange] in comparison to trading other products such as commodities and stocks. The first and most immediate benefit is the sheer liquidity of the FX market, ” an excerpt from Regal Core Markets’ research paper writes.

For forex trading, the new normal is not about investors practicing physical distancing and going online. It is already mostly conducted online, digitally, and remotely after all. The new normal entails greater volatility and unpredictability, which means investors should pay attention to more data points and use thorough analyses and innovative trading strategies.