In a December article by FX Empire, published by on US stock exchange Nasdaq’s website, it referred to the significant impact of the coronavirus on the foreign exchange market. The article stated that in 2020, “Currencies were often bought and sold based on traders’ desire to increase or decrease their exposure to riskier assets rather than on individual fundamentals.”
As we move forward into 2021, the piece said that “traders’ attention will slowly shift towards individual fundamentals,” although this will be dependent on the impact the coronavirus has on markets as the year progresses.
In January, Bloomberg said that investor sentiment is improving as more people are vaccinated against Covid-19, yet predicted that the US dollar would continue to fall as its economy recovers from the effects of the pandemic.
Michael Stark, Market Analyst at Exness, says that although the forex trading environment remains unpredictable, with countries such as the UK closing their borders due to surges in the virus, nations which have experienced more success in containing the spread of Covid-19 may see their currencies rise in value.
“Assuming everything goes to plan, you’d expect trade-sensitive and risk-on currencies like the Aussie and Kiwi dollars plus most emerging currencies to make gains while majors and especially havens retrace their gains against these. That said, what will actually happen is still unclear. Political pressure on countries like the UK and Germany to shut their borders entirely and eradicate Covid-19 instead of live with it might make the wait even longer for the return to normal.”
With Reuters also predicting a further weakening of the dollar in 2021, Monte Safieddine, a Market Analyst at IG, says that this trend will continue to affect forex trading.
“So far it isn’t just predictions of a weaker dollar, but also positioning with larger speculators holding a majority buy (or long) bias of all the FX majors against the US dollar anticipating further greenback
weakness. But that makes it a relatively crowded trade, and hence we’ve been seeing retraceable moves off the lows in say the US Dollar Index that has given forex traders positioning opposite a chance to unwind at times, while testing strategies that rely on price momentum on a lack of follow-through beyond key levels,” he says.
“Should that dollar weakness persist gradually, and the pain felt by traders that have been buying at key support levels will be at a relative minimum, while a ‘short squeeze’ against the majority would do just that, forcing traders into scrambling to cover shorts.”
Raed Alkhedr, Equiti’s Head of Market Research & Analysis, says that a continuing weakness of the dollar may drive investors to turn to less secure investments.
“If the US dollar continues to weaken due to lower interest rates and a stimulus package, that will keep lower risk investments like bonds less attractive for investors, and they will seek out higher returns via riskier investments, such as stocks. Therefore, we could see a rally in the stock markets and industrial metals, as well as commodities paired with currencies such as the Australian, Canadian, and New Zealand dollar.”