Covid-19 seems to be a big threat to the Forex market as the markets of the world experience confusion and chaos. We look at how stock markets are affected, as it is a perfect measure of economic activity and because these markets are interconnected.
Compared to the effects of previous pandemics on the stock market, we 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 the expert at 55 Brokers [FURL]https://55brokers.com/[/FURL] - “With this massive shut down of whole countries in order to stop the spread of the 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 global crisis, investors tend to choose Japanese yen as a more stable currency (compared to more risky USD). Therefore, considering the current situation with 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 2000s. With China being the major trading partner in Australia, everything that affects Chinese economy also affects the Australian dollar.
Investors usually try to avoid dealing with the Australian dollar during time 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 chance the virus will simply pressure the Australian dollar.
Considering all the facts, it really seems like Corona virus effect on the Forex market is not all that negative for the US dollar.
Since investors prefer to risk less and choose more stable assets, it makes sense to look and compare each currency pair. It is expected that with all the chaos and mess, we will soon be heading to the financial and economic crisis, therefore some markets may be affected badly.
Traders and investors would need to adjust trading strategies in times of crisis and need to fasten their safety belts. It is not going to be an easy ride.