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Forex Trading During the COVID-19 Pandemic

The COVID-19 pandemic has caused widespread economic consequences – and the forex market is no exception. World currencies are experiencing extreme volatility, which provides an unpredictable yet exciting opportunity for forex investors. As a result, forex trading volume surged 300% in early 2020.

Due to the pandemic, there have been several notable shifts in forex trading behavior. So, what is forex, and how has COVID-19 impacted investor behavior?

How Has COVID-19 Impacted Investor Behavior?

The pandemic has impacted the investing behavior of forex traders in several ways. Below, we’ve outlined a few of those changes.

The US Dollar as a Safe Haven Asset

With economies worldwide struggling in the wake of the pandemic, many forex investors are flocking to the US dollar as a safe-haven currency. According to FactSet data, the US dollar index DXY – which measures the dollar against six other currencies – is up 7.1% in 2021, its biggest annual gain since 2015.

Generally, it seems that forex investors have favored G10 currencies over emerging markets (EM) currencies during the pandemic, with the US dollar seeing the most trading volume.

Forex and Vaccination Rates

Research compiled by Schroders Economic Group suggests that the currency market has been impacted by vaccine rollout, more so than equity markets. For example, countries with high vaccination rates seem to be doing well in the forex market. Currencies from countries with the highest vaccination rates, such as the UK pound, US dollar, and Canadian dollar, experienced the most success. Conversely, currencies from countries with low vaccination rates have underperformed, such as the Thai baht and Japanese yen.

Structural Changes in Forex Markets

Greenwich Associates recently interviewed 147 Forex investors to see how the pandemic impacted their trading behavior. Here’s what they found:

  • Increased single-dealer volume: The pandemic seems to have accelerated the trend of forex investors preferring single dealer platforms (SDPs) over multi-dealer platforms (MDPs). This points to investor interest in receiving increased support and advice from their dealer.
  • The rise of algorithms: The pandemic also saw a surge in algorithmic trading among forex traders – with many turning to automation for price accuracy and speed.
  • Breaking up larger trades: Forex investors were more likely to break up their trades during the pandemic to help manage volatility and risk.
  • Delayed execution of trades: Forex investors held onto currencies longer due to pandemic-related market uncertainty.

Final Thoughts

Though COVID-19 has impacted every country, the effects on markets have been more uneven. For example, though all markets are experiencing higher levels of volatility, the forex market has been more sensitive to vaccination rollout than other markets.

Additionally, COVID-19 has accelerated pre-pandemic trends in forex trading, such as the increased use of SDP and algorithms. Only time will tell whether these changes will be short-lived or more permanent. Regardless, pandemic-related impacts on the forex market will be felt for years to come.

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