The foreign exchange market has existed for almost thousands of years. It’s one of the most reliable markets out there, with great returns available for investors and traders willing to put in the work. However, as with any market, forex has had to deal with the huge shifts brought about by the global pandemic.
The full extent of COVID-19’s impact on global trade, tourism, travel, and other industries has yet to be determined, but it’s clear that we’ll be seeing the ramifications for years to come. The pandemic has led to supply chain interruptions everywhere, with even new Apple consumer products getting their deliveries pushed back.
As the world slowly tries to recover from COVID-19, we’ll take a brief look below at what forex need to pay attention to in a post-pandemic world.
Prepare for a Slow Recovery
While Reuters reported on lower volatility for forex in June, it’s clear that we haven’t seen the end of the road yet. Although forex markets are certainly more stable now, in general, major pairs are still trading below their average volumes.
This is likely to continue as the rest of the world tries to regain footing after COVID. Although industries like tourism and international trade are beginning to free up, the movement still hasn’t reached pre-pandemic levels. Given the current pace of recovery, investors should be prepared for a bit of a long wait.
Understand Short Term Trends
The majority of forex trading trends and signals only work for short-term trading. The market moves fast, and in order to be able to make the right decisions quickly, forex investors and traders need to have the most up-to-date information available.
A post on trade volatility by FXCM recommends looking at the top movers among global trends when considering trading opportunities. Although things move quickly in forex markets, you generally can’t go wrong with supporting traditional currencies like the U.S. dollar, the Japanese yen, or the Swiss franc. If you’re more cautious, trading pairs like USD/EUR and USD/CHF tend to be less volatile and aren’t too affected by short-term trends.
Watch Out for Higher Inflation Levels
Probably the most evident effect of the global pandemic on the economy has to be the rising levels of inflation. A CNBC report notes that while this higher rate of inflation is probably transitory, less stable inflation across countries could lead to a spike in exchange rate volatility.
Experts also noted that countries like the U.S., the UK, Canada, and Australia were at most risk for sustained higher inflation among the developed countries. This could mean that these currencies could weaken nominally relative to other currencies in Europe or Asia. Other countries like Brazil, South Africa, and Indonesia are also at risk of higher inflation and currency depreciation.
Anticipate Long-Term Impacts
Forex is generally known as a short-term market, with the effects of even small changes in the market manifesting immediately. However, given just how large of a paradigm shift the global pandemic is, it’s likely that the effects we’re seeing now could extend well into the future.
Insights from Citibank suggest that the current situation of the global forex market is characterized by a ‘fear of the unknown. COVID-19 had a particularly devastating impact on supply-and-demand chains all over the world, spanning most, if not all, major industries.
The long sequence of the supply chain could also mean that forecast errors are more likely, given the unprecedented impacts that most actors in the supply chain are facing. Given all of these factors, it’s clear that any decision made with regard to forex trading now may have to be weighed against possible future outcomes. What this means for the forex market, only time can tell.