The landscape of the foreign exchange market in 2020

The foreign exchange market is the world’s largest financial market, with more than 5 trillion dollars being traded every working day. Not all of these transactions are high-flying business traders - some are just expats sending money home or tourists preparing their holiday money. Transactions like these are still part of the foreign exchange market and are therefore still affected by the state of that market. That being the case, accurately assessing the landscape of the foreign exchange market and predicting the coming fluctuations impacts a lot of people around the world.

The market functions exactly as it does when you are getting some Thai baht changed for your home currency - you exchange the baht for an equivalent value of rupees, pounds, dollars or whatever currency you want. However, as you will have seen, that value varies slightly from one minute to the next and can vary significantly from day to day, month to month and year to year. These fluctuations have a wide range of causes, from world events to local political instability, predictions of economic growth to a hike in interest rates - the list goes on. As such, the landscape of the foreign exchange market in 2020 is inexorably linked to the global political, economic and societal landscape.

Pessimism in 2019

As last year came to a close, the mood of those attempting to predict market movements was very gloomy. Throughout 2019, political tensions in important parts of the world had made a global recession seem inevitable. This was nowhere better illustrated than with a couple of the richest nations in the world - the US and China - constantly increasing and adding tariffs on importing each others’ goods in the ongoing trade war that first started in January 2018. The confusion over Britain’s departure from the EU and the threat of a no-deal Brexit also put a lot of uncertainty into financial markets, making it nearly impossible for traders to comfortably make any large deals.

And yet, despite all of this political and economic instability, 2019 was a year or record lows in terms of volatility in the foreign exchange markets. This has partially been put down to central banks making some remarkably effective moves to keep the volatility to a minimum, but some commentators believe that the political and economic events were so remarkable that most people just maintained a ‘wait-and-see’ stance, not making any significant moves until they got a clearer picture of what form the fallout would take. They further said that this was merely the calm before the storm and that, as events progressed in 2020, the volatility would finally hit the foreign exchange markets, and would hit them hard.

Enter Coronavirus

What no one could have predicted, as 2019 came to an end, was a global event on the scale of COVID-19. The virus had only just been identified by the end of December and, while Chinese officials were a little concerned about it, no one expected that it would result in a worldwide pandemic within a matter of months. In attempting to counter the spread of the virus, we have seen one of the most significant socioeconomic upheavals in recent history.

The economic impact has already been felt. In response to the requirements of social distancing, huge numbers of people in countries around the world have been put on reduced hours, unpaid leave or were made redundant. Supply chains have been disrupted, businesses closed and others forced to adapt to new ways of working that minimise face-to-face interactions.

This will inevitably reduce the gross domestic product (GDP) of some countries, which will undermine the market confidence in their currencies. Those countries hit the hardest will likely see their national currencies fall in value the furthest, especially compared to those better able to weather the storm. Furthermore, different countries have applied different COVID-19 policies, resulting in different recovery rates. As Far Eastern countries are already starting to ease their social distancing measures and allow people to return to work, some western countries are still suffering hundreds of Coronavirus-related deaths each day. Again, this disparity will generate much greater gaps in currency values.

While virtually every industry has been hit hard by the impacts of COVID-19 and the measures taken to minimise its spread, tourism was perhaps the hardest hit. International flights have all but halted and most travellers are far too concerned about contamination to risk even a domestic one. With fewer people travelling, there’s less of a need to exchange currency meaning fewer trades on the foreign exchange markets.

Ultimately, however, the impact of the COVID-19 pandemic on foreign currency trading is nearly impossible to predict. No one knows for certain how long the pandemic will last, nor how long the extreme preventative measures enacted by most countries can be endured. The virus could have a resurgence towards the end of the year or a vaccine could be developed in time to stop the spread effectively overnight. There may even be unforeseen social, political and economic knock-on effects. It’s currently impossible to tell. That being the case, the ‘wait-and-see’ policy of 2019 endures, to a degree, and attempting to forecast movement in exchange rates for 2020 is futile.

Growing digitisation

One of the many counters to COVID-19 was a rapid increase in digitisation among a broad range of industries. In order to keep social interactions to a minimum, many companies rapidly accelerated their digital transformations, adding mobile and online services to replace the custom lost because of restrictions on face-to-face interactions. This has been something of a glimmer of light in the otherwise grim landscape of the foreign exchange market in 2020.

In fact, according to the Foreign Exchange Market: Global Industry Trends, Share, Size, Growth, Opportunity and Forecast 2020-2025, digitisation and growing urbanisation in emerging and developed economies has led to healthy growth in the market. Advancements in the technology surrounding foreign exchange, including the availability of outright forward and currency options, have also made some quite optimistic about the future, to the extent that the report’s authors believe that there will be an increase in the market’s compound annual growth rate of 6 per cent between 2020 and 2025.

Concerns over liquidity

By way of contrast, a survey recently conducted by JP Morgan showed that Coronavirus is not the only concern for foreign currency traders in 2020. Their Annual Client Survey, which tracks the outlook of 650 institutional traders, found that a third of them fear a sudden drop in liquidity - the ease with which money can be moved around and traded. If that drops, making trades will become much harder. This concern was cited nearly twice as often as the next biggest worry - workforce efficiency. Price transparency was close behind that as the third biggest concern among currency traders.

The problem, they explained, is that liquidity is currently only good because central banks have have been stepping in to make it so. The chances of them keeping this up, as the COVID-19 crisis endures month after month after month, is pretty slim. Something has to give eventually, but when that will happen is impossible to predict. Liquidity could also be impacted by a reduction in exchanges as more traders decide to wait out this period of uncertainty rather than taking risks.

How does it affect you?

The landscape of the foreign exchange market in 2020 has a great impact on expatriates, perhaps more than most. With financial interests in at least two countries - their country of origin and that which they now call home - any instability between the currencies of the two will result in lost or gained value. Depending on which currency and jurisdiction you are paid in, even the slightest shift in currency values could result in an effective pay rise or cut - and potentially a big one.

The unfortunate fact is that there is no faultless way of predicting exactly what will happen in the foreign exchange market, especially not in these unusual and uncertain times we find ourselves in. There are simply too many factors in play, and that’s before you include unpredictable variables like Coronavirus.

The general economic outlook for a country is certainly a crucial determinant when it comes the value of the national currency. Thailand’s economic outlook is currently (at time of writing) the “worst in Asia”, with GDP expected to drop by 8.1 per cent this year. A significant factor in this is the aforementioned dramatic drop in tourism, which amounts to 15 per cent of GDP in Thailand. However, the impact of COVID-19 was relatively mild, with comparatively few cases and deaths from the virus recorded. This might have an impact on the economic recovery or it might not. Unfortunately, the policy of ‘wait-and-see’ continues to be the most advisable.

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