How COVID-19 Affects The Forex Market & COVID Trading Tips

Forex Coronavirus Crisis

Just like the virus brings more questions than answers right now, so too does the continuing impact of COVID-19 on the global markets. Worldwide, the markets are varying greatly in terms of the 'COVID effect'. Market volatility is at a record high, with many spectators stating that they have not seen such figures since the global economic downturn of 2008.

There have been huge 'winners and losers' in the fx markets as a result of the coronavirus outbreak. The most successful currency has arguably been the US dollar, which has appreciated against all of the G10 currencies (excluding the Japanese Yen and the Swiss Franc).

GBP has seen a sharp decline since the beginning of the COVID-19 global pandemic, but in the last few weeks it has demonstrated heightened stability in despite of the UK introducing a further 3 week lockdown (whereby social gatherings of any sort are forbidden, and the majority of businesses are closed down, except for 'essential' businesses - such as food retail, various distribution channels for food and essential supplies, public transport, and more).

Another impact can be seen on this chart. This is the EURUSD chart with a high volatility on a one-month (April 2020) timeframe taken from the web-version of MetaTrader 4.

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Investors from all around the world have been trying to invest as much as they can into the US dollar and other strong currencies, in order to protect their investment portfolios. As the COVID-19 pandemic continues, there is a looming threat of a global recession, and this has largely fueled the movements of investors.

Forex Market Continuity

COVID-19 has affected all sorts of industries, including healthcare, the travel industry, hospitality, and many more. This has also meant that businesses and governments have responded in varying ways, some more drastic than others.

For instance, FX trading continuity plans have been put under severe pressure, and are being tested greatly in terms of their effectiveness and readiness. As we mentioned earlier, volatile market conditions are prevalent in all global financial markets right now.

For example, spot matching reached over 100 billion USD within one day! Thereby making it clear that there is a real need for markets to move quickly in these extra volatile market conditions.

One thing that bodes well for the FX markets is that many businesses are opting to continue their operations by instructing their employees to work from home, rather than furloughing their staff or making them redundant - this is of course relative, as some industries simply cannot continue without a physical presence.

But where there are businesses still trading as best they can within these uncertain times, there are opportunities for forex traders and traders in other financial markets to capitalize!

Furthermore, FX businesses are required to follow the FX Global Code Of Conduct. Specifically, they must have business continuity plans (plans which assure that the business will continue to run smoothly during periods of uncertainty) which are measured against and are appropriate to the size, scale, type, and complexity of the business they are running.

Therefore, FX traders can perhaps be safer in the knowledge that there are plans in place which provide some reassurance in terms of FX market continuity.

Forex Reserve

In the Indian foreign exchange market, it is estimated that foreign investors withdrew up to $15 billion towards the end of March, with a further $6 billion withdrawn at the end of the third week of March (ending March 20th).

This is the biggest weekly fall that has occurred in the forex reserve since the global recession of 2008. The increase in risk aversion is a direct response to the global coronavirus pandemic, with investors seeking to protect their investments by withdrawing huge amounts of capital from emerging markets such as India.

The forex reserves are expected to drop further in the coming weeks, as investors have sought to reinvest their capital in 'safe haven assets' such as the US treasury.

COVID Trading Tips

These are uncertain times we are living in, but the markets are still very much alive! We have gathered some excellent covid tips for traders which are listed below, so that they can understand how to trade during a pandemic, and potentially even benefit from this period of uncertainty.

#1 - Take Advantage of Volatility, But Sensibly

Key points to consider:

  • Trade when people are buying or selling a lot
  • Monitor news updates & economic data
  • Choose whether to trade or not in response

We can always expect sudden shifts in market volatility due to the rapidly changing nature of our world. During this coronavirus outbreak, the rules are no different. The only difference is that there is no predictability with regards to emerging news headlines.

What is meant here is that while you might be able to anticipate sudden shifts in market volatility (in terms of upcoming meetings on international trade deals, non-farm payrolls etc) it is simply not possible to predict anything with these current headlines.

However, there are daily updates from the governments of most countries, with nations such as the USA and the UK providing daily briefings on the latest developments with the COVID-19 virus, as well as information regarding any changes that are to be implemented (such as quarantine extensions).

With this in mind, forex traders could reasonably assume that each briefing is likely to have some sort of impact on the fx markets. For example, an increase in infection rates for a given country could lead to an increase in market volatility.

Therefore, traders might want to consider adjusting their trading schedule and strategy in response to such news - i.e. take advantage of the volatility, but do it sensibly!

Control Your Emotions

Key points to consider:

  • Don't trade if you're worried about an investment losing value
  • Wait, be patient, the investment may recover
  • Stay calm when you trade

You've likely read or heard this in countless articles, books, and interviews delivered by professional traders - but now it's truer than ever! Fear inevitably has an impact on market price action, since it is a driving force behind fx trading.

The biggest thing to consider right now is the uncertainty surrounding how long this global pandemic will last. Many investors likely have or will be selling their assets as quickly possible right now, in order to protect their investments. Fear is driving their behaviour, and while this might seem like a sensible move in the short term, in the long term they might have made a decision that will cost them.

Sure, they won't lose any more capital or the value of their current investments, but they could have lost significant potential gains over a long term period. This is more applicable to stock trading (which is typically long term), so how does this apply to fx trading?

Well, the key thing to keep in mind is that it provides wider investment opportunities on the forex markets, due to the fact that there are fewer seasoned traders trading in the markets. Just because some traders decide to withdraw and quit, doesn't mean you should too.

Summary

Like we mentioned earlier, high volatility within the fx market brings with it opportunities to secure far higher investments than what might normally be possible. So don't be afraid to trade! Be sensible, be calm, and keep track of the markets!

Stay tuned! Also read about:

- Best Books about Forex for beginner traders;

- Basic Forex Terms to get started;

- 7 Best Trading Movies.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.