This is how we should be trading the FX market in 2020

2020 has turned out to be an unusual year, where businesses, livelihoods and social norms have been overturned. The same can be said for trading markets, with volatility becoming the order of the day.

What should FX traders do in this market? And while 2019 seems like a distant past with concerns that seem trivial amid the Covid-19 pandemic, what lessons can we learn from it? Here’s what Lee Yi Jie, strategist at Phillip Futures thinks.

2019 – A dull year for FX

2019 was a relatively quiet year for forex markets, according to Lee.  “2019 was a dull year for most currencies versus the greenback (USD) – with the exception of the sterling (GBP) and the Canadian dollar (CAD) – as foreign exchange volatility sank to a record low.”

The forex market remained peaceful for much of 2019 until the Federal Reserve (FED) started cutting rates in July and the Conservative Party led by Boris Johnson won the majority in the snap election of December.

“The FED rate cut triggered a rate cut momentum for other central banks around the world, with the ECB following suit with their first cut since 2017. Thereafter, both Australia and New Zealand were at record low interest rates of 0.75%,” Lee said.

“The brexit deadlock also took a turn when Boris Johnson delivered the biggest electoral win, bringing the Conservatives back into power. The exit polls set off a surge of GBP buying, and the GBP ended 2019 as the best performing currency.”

Even then, the impact of these events did little to impact most major currency pairs.

“Although investors in currencies experienced some market volatility towards the end of the year, due to the trade war, central banks cutting rates, Brexit and the rally in stocks, all other currencies had little change over value versus the USD,” said Lee.

Best performing currency pairs of 2019

So which currencies performed the best and which ones performed the worst last year?

According to Lee, CAD performed the best in 2019. “The key reason was because the CAD had a close correlation with the strength of crude oil in 2019.  Inflation in Canada was well within the BOC’s expectations and quantitative easing was not on the radar. In contrast, the U.S. had already begun theirs.”

The next best performing currency in 2019 was the GBP. “With a sweeping victory for Boris Johnson’s Conservative Party, the mandate for Brexit was clear,” he said. “Investors regained their confidence, and demonstrated this by the show of strength for the GBP, one day after the electoral win.”

Which currencies performed the worst in 2019? Among the most heavily traded G10 currencies, the worst performing currency was the Australian dollar (AUD), followed closely by the New Zealand dollar (NZD).

“The U.S. – Sino trade war weighed on the price outlook of commodities and directly impacted the AUD in 2019,” explained Lee. “Heavily impacted by the trade war, it came as no surprise that the AUD was one of the worst performing currencies of 2019.”

What should forex traders expect for the rest of 2020 and beyond?

“The outbreak of Covid-19 has changed the whole structure of the currency markets,” he says. “Key global equity markets are currently in bear market territory, and central bank policy makers are scrambling to mitigate the adverse impact on their economies.”

“The USD being the most liquid currency will continue to be the most resilient currency. Similarly, with the Japanese Yen (JPY) being a safe-haven currency, the yen will likely shine in times of risk-off environments.”

In particular, Lee highlights a few currency pairs to watch. “In times of uncertainty and risk-off environments, JPY crosses will be interesting to watch, particularly the EUR/JPY, GBP/JPY and the USD/JPY pairs.”

Trading FX in a global pandemic

“Investors should look out for potential signs of whether the battle against Covid-19 will be a long-drawn affair,” says Lee. “A prolonged outbreak will eventually usher us into a global recession, especially if central banks delay decisive mitigative measures like quantitative easing or rate cuts, which will potentially result in an adverse impact on currencies.”

“Aside from currencies, investors may also want to take a look at the safe-haven asset, gold,” he concludes.

Catering to investor needs in a Covid-19 world

In order to better serve investors during the pandemic and beyond, Phillip Futures has been working to expand its offerings on the Phillip MT5 platform, allowing investors to take advantage of the trading opportunities in asset classes outside of spot forex and spot bullion. Phillip MT5 now also offers global indices CFDs and crude oil CFDs, with plans to offer global shares CFDs as well.

“These extraordinary times present greater risk along with greater investment opportunities for investors,” says Lee. “With instruments from various asset classes moving in tandem, traders on Phillip MT5 can potentially make better trading decisions with an unobscured view of the financial market.”

If you are ready to start trading FX, you can download your MT5 demo account here.