Profound impact of Covid-19 on forex

Covid-19 has had an immense impact on financial markets and forex trading, and it will continue to do so in the long term. At a webinar hosted by Refinitiv, Wilson Leung pointed out the reasons why this financial crisis caused by the COVID-19 pandemic will continue to greatly affect forex trading and the financial markets for a long period of time.

In the US, the unemployment rate has caused demand for the dollar to rise while traders turned to safer currencies. However, you should always appraise the influence of long-term factors which current movements in dollar neglect as they are driven by short-term emotions.

Currency volatility as vaccine gets tested

As vaccine trials tested markets’ optimism across the US and Europe, the dollar dropped at its lowest for a week. Besides Pfizer’s announcement on the 95% effectiveness of the late-stage trial of its COVID-19 vaccine, it had little impact on the dollar. The US Dollar Index, which is used to measure the value of the dollar against a basket of six world currencies—Euro, Swiss Franc, Japanese Yen, Canadian dollar, British pound, and Swedish Krona—reached 92.327 after dropping as low as 92.207.

This was the lowest point it ever reached since November 9. As Giancarlo Corsetti, Emile Marin notes, ‘‘In crises, the dollar tends to appreciate – especially against emerging market currencies – and dollar liquidity becomes scarce. This column shows that today’s events are following the historical pattern. Forex market turmoil is preceded by an inversion of the US yield curve as investors, anticipating tough times ahead, require relatively high short-term yields and an appreciation of relatively risky currencies until the disaster occurs. Then, the dollar appreciates sharply. Then, emerging markets suffer massive capital flight. What’s new about the COVID-19 crisis is its scale and speed.’’

Regarding Bitcoin, which is considered to be a safe haven, it reached $18,000 which was positively surprising compared to the last three years. The euro rose about 0.1% at $1.186 despite Poland’s and Hungary’s blocking of the European Union’s 1.8 trillion-euro financial package to boost the Covid-19 depressed economy. During this global uncertainty another currency considered a safe-haven, the Japanese yen, climbed to a one-week high. At 103.95 per dollar, the yen returned to where it was in November 9, regaining big portion of the losses after Pfizer’s announcement of the working COVID-19 vaccine.

Unemployment and Forex Trading

Assessing the current situation around forex trading will also depend on one of the biggest factors, that of unemployment, which is constantly rising worldwide as a result of businesses closing due to Covid-19 and continued lockdowns.

Besides going through volatile market periods, there have been optimistic moments reflected in stock indices such as the S&P 500 and the Dow Jones Industrial Average, which signalled ‘risk-on’ patterns, at which point traders sell dollars.

This only shows that emotion rather than actual data influence those indicators and that these affect the markets in the short-term. Current prices are not representative of the longer-term results of mass unemployment.

US and Europe’s response to Covid-19

It is worth noticing that anything affecting a country’s economic growth will always have a negative impact on its currency. This is precisely the case with the most traded pair, the USD/EUR.

In the US, with the worst recession and people losing their jobs, the dollar’s value declined. In Europe, job losses were far less than the US while the economy is slowly recovering. The outcome is an unheard bull market for the EUR/USD.

DISCLAIMER:

This information is not considered as investment advice or an investment recommendation, but is instead a marketing communication.

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