Is the Forex Market Viable in the Current Economic Climate?

Broadly speaking, the forex market is one of the most attractive entities of its type from an investment perspective.

After all, this market sees approximately $7.5 trillion traded globally every single day, while the highly leveraged nature of the space and its ability to deliver margin-based profits draws aspiring investors from across the globe.

Like all markets, however, the foreign exchange has been impacted by the coronavirus outbreak in the not-too-distant past, while the subsequent economic downturn has also impacted currency prices.

Forex Market Viable
Forex Market Viable

How was Forex Trading Impacted by Covid-19?

Unsurprisingly, the impact on the forex market initially followed the global spread of the virus, with the Chinese Renminbi one of the first currencies to see a marked decline in value.

Interestingly, this caused a knock-on effect for the Australian dollar, with China and Australia bound by a longstanding and lucrative trading partnership. In fact, China is Australia’s largest trading partner, with the annual, two-way trade volume between these two nations peaking at $215 billion as recently as 2018.

Historically, the Renminbi was restricted to trade in narrow and limited ranges, creating a scenario where the AUD was subsequently used as a proxy.

However, many investors saw both as increasingly risky currencies as the coronavirus pandemic took hold, while some took flight and eschewed emerging currencies in exchange for more stable assets.

In this respect, China led a steep decline in the value of emerging Asian currencies during Q1 and Q2 of 2020, as the impact of lockdowns and quantitative easing measures (which typically involved slashing the base interest rate and lowering the demand for domestic currencies overseas) caused a huge fall in prices.

Over time, all currencies were undermined by the pandemic and subsequent quantitative easing measures, as central banks across the globe sought to lower interest rates and make national currencies less appealing to overseas investors. This led to currency depreciation and saw capital inflows decrease markedly over time.

What About the Current Economic Climate?

China has always been something of a trailblazer in terms of Asian currencies, and the trends that emerged in the aftermath of the pandemic highlighted a marked recovery for the country’s currency.

More specifically, the Renminbi embarked on its largest quarterly rally on record in Q3 2021, strengthening by 4.3% to an impressive 6.7730 per US Dollar. It also emerged as the best performer in Asia during this period, as the buying momentum rose to its highest level since January of the same year.

However, the subsequent economic fallout has seen the corrosive combination of rampant inflation and soaring base interest rates. These trends have been apparent across the globe, with developed economies such as the UK seeing their rate of inflation remain in double digits since October.

While what causes inflation can vary and include a large number of factors, high levels of inflation typically undermine the value of national currencies by eroding purchasing power over time.

Of course, central banks look to counter rising inflation by hiking the national base rate of interest, and while this typically benefits currency values, the disproportionate nature of the cost of living means that the forex market remains mired in depreciation at present.

This trend shows no sign of abating for now, although the UK PM Rishi Sunak has pledged to halve inflation on these shores by the end of 2023.

How Does This Impact FX Traders?

The good news for investors is that forex is a speculative marketplace, in which traders are able to leverage the sector’s inherent volatility to their advantage and trade price movements both positive and negative.

However, this task is challenging in the current economy, where virtually all currencies are weighted down by inflation and backed by governments engaging in some form of quantitative easing.

2023 is poised to see the dominant US dollar depreciate once again, however, just as it did in the wake of the Covid-19 pandemic. This will enable traders to profit by hedging against the greenback, with assets like the EUR/USD and GBP/USD offering significant potential and liquidity in 2023.

Remember, traders can also use risk management tools such as stop loss and take profit orders to safeguard their capital in the current climate.

This tool works by automatically closing positions once a predetermined level of loss or desired profit has been reached, ensuring that disproportionate losses aren’t recorded during a particularly volatile period in the marketplace.

So, FX traders retain every chance of succeeding even in a challenging and volatile market in 2023, especially if inflation does start to fall gradually in the coming months.

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