23 March 2020

The impact of Covid-19 on the Forex market

Submitted by Linda Janse Van Vuuren
The impact of Covid-19 on the Forex market

Most of the economies all over the world are about to hit the bottom as the market crash becomes stronger due to the dangerous and fast-spreading Coronavirus. 

This newly emerged disease seems to be a big threat to the forex market as the markets of the world experience confusion and chaos.

As the US dollar has fell, resulting in a higher volatility driving the value of the dollar up, we can surely say that Corona virus has a huge impact on these global markets. They are taking all the possible measures to liquidate this hit, however it seems inevitable.

In order to see the consequences of the Corona virus on Forex market, we can look at how stock markets are affected, as stock markets are a perfect measure of the economic activity and also because these markets are interconnected.

If we compare the effects of the previous pandemics on the stock market, we will see that there was a little negative impact on the world economies.  However, the impact of the current epidemics on the Forex market may be very different. According to experts from 55 Brokers, and Forex Broker Listing -  “With this massive shut down of whole countries in order to stop the spread of the Corona virus, the impact on the Forex market is inevitable as it may simply restrict economic activity” 

Currencies Affected

 Let’s have a look at the currencies that may be affected the most. Over the last days there has been a rush on the Japanese yen. Since Japan is considered to be the largest creditor nation, Japanese yen is called a financial haven currency, especially in comparison to the US dollar.

In the times of the global crisis, investors were tend to choose Japanese yen as a more stable currency (again compared to more risky USD). Therefore, considering the current situation with the market and investor preferences, there is a chance the USD/JPY will simply fall in value. 

As to the EUR/USD, it has experienced some sharp losses due to the demand for dollars. On the 12th of March, the European Central Bank (ECB) has shared its plans on the ways to fight the Corona virus impact on the economies.

However, the investors and markets were not satisfied with the ECB decision to avoid the lowering interest rates. Recently, the US dollar has been favored by the markets for being the most liquid currency in the world and being also considered as a safe haven currency.

Last week GBP/USD has officially hit the bottom, being crashed as low as $1.1757, which is actually the weakest it has been for the last 35 years or so. This drop started when the Bank of England cut the base interest rate to 0.25%. It is one of the examples of the economic impact of the corona virus, matched with current Brexit situation and the UK’s account deficit. 

In Australia, the possibility of a recession is getting higher and the commodity prices fall as the AUD/USD hits the low it hasn’t seen since the beginning of the 2000's. With China being the major trading partner in Australia, everything that affects Chinese economy also affects the Australian dollar. 

The investors usually try to avoid dealing with the Australian dollar during the period of uncertainty and instability as this currency is considered to be the risk one. If the situation keeps on evolving in the negative perspective, there is a change the Corona virus will simply pressure the Australian dollar. 

Considering all the facts, it really seems like the dollar benefits from the current pandemic situation. The Corona virus effect on the Forex market is not all that negative for the US dollar. 

Since the investors prefer to risk less and choose more stable assets, it would make sense to look and compare each currency pair. It is expected that with all this chaos and mess, we will soon be heading to the financial and economical crisis, therefore some of the markets may be affected badly. 

The traders and investors would need to adjust their trading strategies in times of crisis and would need to fasten their safety belts, as it is not going to be an easy ride.