The global pandemic has changed many aspects of daily lives.
Bosses have learnt that their staff do not need to be in the office to get work done. Employees are figuring out working from home does not mean less stress.
The forex market also has been somewhat volatile due to the COVID-19 pandemic. It is not all bad news, though.
Here are three ways the pandemic has changed the forex trading climate:
1. Reactive major currencies
Generally, how nations responded to the pandemic affected their local economies.
Nations that clocked high COVID-19 cases likely saw a weakened currency. Markets that managed to somewhat contain their spread experienced a more stable economy.
Most markets were reactive due to the unpredictability of the virus. This was evident in the early phase of the pandemic.
The forex market echoed the volatility, creating a challenging valuation landscape.
The UK Sterling, specifically, dipped 15% against the US dollar in the first half of 2020. It dropped to its lowest against the US dollar in three decades, after the first lockdown in March 2020.
While the US dollar seemed stable at first, it came under pressure in 2021 as the virus spread.
2. Emerging markets see fluctuating valuation
Emerging market forex rates also were affected in the early days of the pandemic.
The US dollar's perceived safety pushed currencies of emerging markets to record lows. CNBC reported that the South African rand dipped 32% against the dollar in the first quarter of 2020. The Mexican peso also dropped 24% in value.
Analysts said policymakers in emerging markets might allow their currency to depreciate. They do so in hopes that this will absorb shocks in their local economy.
For instance, major floating currencies such as the rand and peso could see benefits. One analyst described the move as "escape vaults" to buffer the devaluations of growth.
Such moves might lead to the undervaluation of emerging market currencies, market analysts said.
This implies that exchange rates are lower than they should be, relative to other factors. These can point to the currency's purchasing power and strong demand supply.
3. Changing trading styles
The pandemic also triggered changes beyond the markets. Trading styles have morphed, according to a Greenwich Associates study. The survey polled forex investors around the world.
It revealed that the pandemic drove up volumes on single-dealer platforms; voice trading also climbed.
Investors saw increasing importance in forming relationships with dealers in the forex market. This was especially so as perceived liquidity dipped, the survey noted.
Forex investors further shifted towards smaller volumes, preferring to break up larger trades. They also delayed the execution of their trades. The Greenwich report noted that these behavioral shifts were expected to remain post-pandemic.
And with forex markets now almost fully digital, 20% of forex investors said they had upped their use of voice trading tools.
Some 67% underscored relationships within the forex market as a significant development. More forex investors, though, were turning to algorithms as a tool in their trading.
To sum up
Market volatility as a result of the pandemic may linger a while more. This is likely as central banks look to return to some normalcy after two years of massive economic stimulus.
There is uncertainty around how markets will hold up as the dust begins to settle. Businesses have to learn to adapt to a new market norm. And they have to do so without further government aid.
The pandemic has resulted in many unknowns, creating an environment that is unfamiliar. There will be some guesswork involved in figuring out how things will play out.
This uncertainty will likely spill over and lead to a volatile forex market.
If you are spooked by the unknowns, keep your trading skills in check with plenty of practice. This can build resiliency and better prepare you for an erratic market landscape.
Several trading platforms provide a demo account so that you can carry out forex trading for free.
For instance, Forex4you provides hands-on experience trading in a live market. You can do this without any capital or risk of incurring significant losses.
The platform supports more than 150 trading instruments, including currencies and commodities, so you can practise with different currency pairs.
You also can follow traders with more experience. Fore4you's copy trading service - Share4you - allows you to copy the activities of traders skilled in forex. They likely are adept at dealing with erratic market conditions. You can learn by observing their trading activities.
Forex Trading involves significant risk to your invested capital. Please read and ensure you fully understand our Risk Disclosure.