Historically, the normal barometers of volatility and currency movements include a long list of economic predictors, ranging from PMIs to employment figures. These forecasts signal anticipated fiscal and economic policy responses from central banks and governments and offer us the tools we need to make informed decisions about the relative strength of currency pairs.
However, the relationship between economic indicators and currency strength was blown away in March, as COVID-19 shook the global economy. Stocks plummeted across the board as investors lost confidence in pretty much everything. The notable exception here was the USD which strengthened as its reputation as a safe haven held true.
The panic has cooled off since March, but since then the landscape has changed dramatically.
The traditional economic indicators are still giving up nothing – and have lay impotent for months. And in fact, the unprecedented scenario caused by COVID means that comparisons with historic figures are now completely unreliable. Economies that have been partially closed down are providing economic figures that are literally off the scale (see US unemployment bar chart).
Little by little, we watched the global stock markets recover, propped up by central banks and governments, along with economies now buoyed on a raft of asset buying and QE. But as economic confidence returned, it became clear that the USD is acting in an inverse correlation to the S and P 500. The dollar is now intrinsically tied to global confidence in the recovery from COVID: when good news sends the markets up, the dollar goes down and when the markets go down, the dollar rises.
This inverse relationship is a strong indicator of the uncertainty that continues in the markets, which are skittish to say the least. And until the conventional economic indicators start to kick in and make an impact on the markets once again, currency volatility will remain high and continue to move erratically.
In the short term, we’re going to see even more of this turbulence with lockdowns easing. And right now, the long term isn’t looking much different. With new, second wave COVID outbreaks potentially on the horizon (and already happening in some parts of the world), there is a very real possibility that this currency volatility will remain prevalent for some time.
Contributed by Ralf Martyrossian – Ralf is a Business Development Manager at Privalgo, specialising in partnerships and property transactions. Along with passion and knowledge when it comes to financial markets and economics, Ralf is also a English Literature graduate from the University of Bristol. Besides from analyzing currency charts, in his spare time Ralf enjoys boxing, cycling and cartography.
Speak to Ralf or another member of Team P today – Let us tailoring our approach, to maximise your next currency transfer.