Almost every industry has been touched by the COVID-19 crisis in some way. The foreign currency exchange (forex) market is no exception. Traders must understand the long-term implications that the pandemic has created and the affect that it will have on their strategies.
One of the biggest ways that the forex market has been shaped by COVID-19 is that traders are witnessing an increased distortion between the currency prices in emerging and developed market economies. Initially, it appeared that emerging markets were overwhelmingly hampered by the crisis. However, the truth is becoming increasingly complicated.
COVID-19 creates imbalance in market opportunities between emerging and developed economies
A month after the COVID-19 crisis fully erupted, CNBC author Elliott Smith wrote an article talking about the impact it had on the Forex market. The article pointed out that currencies attached to emerging economies were trading at all-time lows. Investors were increasingly likely to hedge their bets by taking long positions with more developed economies.
However, the truth has proven to be a bit more elusive over the last few months. New economic indicators have shined a more favorable light on Forex traders investing in emerging market currencies. Some reasons that the market is turning around are listed below.
Oil demand is starting to rebound
They were different reasons that emerging markets suffered even more heavily due to the COVID-19 pandemic. One major reason was that many emerging markets are highly dependent on oil exports to keep their economies afloat.
The global oil market obviously plunged immediately after the COVID-19 crisis surfaced. People were forced to quarantine in many parts of the country. Even areas that did not pass strict stay-at-home orders compelled many businesses to shut down. Even people that had the option to leave their homes didn’t have many places to go. Therefore, oil sales tanked for months, which left a strong negative footprint on the economies of emerging markets that depended on oil sales.
As many areas have started re-opening their economies, people have started to travel again. This has lifted oil sales, which is helping the economies that depend on oil production.
Of course, oil sales have not returned to their pre-pandemic levels. However, they have risen significantly from the previous lows. This has helped somewhat stabilize their economies, which has translated into stronger currency prices.
Many emerging economies are escaping the worst of the pandemic
During the onset of the pandemic, it was widely speculated that more developed economies would be most resilient. The United States was rated the country that was most likely to persevere in the face of such a crisis.
These assumptions have proven to be widely false in more recent months. The United States has the highest number of COVID-19 cases in the world. Even adjusting for a per capita basis, it is doing worse than almost every other country. Densely populated developed economies tend to be suffering the worst. Meanwhile, more sparsely populated emerging economies have been able to social distance better and keep infections a lot lower. They are also better at developing business ideas in response to the crisis.
Some smaller countries have also been tremendously astute about managing the crisis. Singapore and South Korea led the world in their contact tracing efforts, which helped them deal with a crisis almost entirely unscathed. This appears to be good news for FX brokers in Singapore.
These countries have been able to resume economic activity for the most part, without having to shut down nearly as long. As a result, there are economies have been relatively stable.
Market turbulence has shifted in recent months
Market turbulence is another factor. Many people initially chose to invest in currencies of more developed economies. However, they have decided that it made sense to experiment with different currency pairs. This might cause them to shift their asset allocations more towards emerging economies.
Emerging economies might be making a bit of a comeback during the COVID-19 crisis
The COVID-19 crisis was a bane for Forex traders investing in emerging currencies. However, the situation has started to stabilize over the last couple of months. Emerging economies are beginning to fare better than they were at the beginning of the pandemic. In some cases, they are even outperforming the economies of more developed countries. This might lead them to favor investing in emerging economies again.