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In April 2019, the forex trading daily turnover crossed a whopping $6.6 trillion, according to the Triennial Central Bank Survey, released by the Bank for International Settlements. While the US Dollar retained its top position as the most traded currency in the world, emerging market currencies accounted for 25% of the global turnover.
The forex market is attracting retail traders now, more than ever before. Historically the domain of large financial institutions and corporations, the forex landscape today is marked by the number of individual investors and traders. This has been made possible with the advent of robust online trading platforms that have eased the process for retail traders, while allowing them access to high liquidity. Also, with economic uncertainty looming large globally, the currency market appears to have become a viable option for portfolio diversification.
The New Year brings a whole new spectrum of political events that could spark currency volatility. Let’s take a look at some of these events to understand how they can provide valuable trading opportunities.
The EU currently holds 40 free trade deals with more than 70 nations. The UK can trade with these countries without having to pay tariffs on a majority of the goods. However, post-Brexit, which is due on January 31, 2020, the UK will have to sign new trade deals with these nations. Also, after Brexit, the nation will be free to pursue deals with nations that have no existing EU deals, like the United States.
The challenge lies in the ability of the Boris Johnson government to sign free trade deals with Anglosphere countries like Australia, Canada, New Zealand, USA and India. With the US, Australia and the United States, it currently has “mutual recognition agreements,” but no free trade deals. If these deals do happen, currencies like the CAD, AUD and NZD stand to gain.
Commodity currencies like the Australian Dollar (AUD) and NZD (New Zealand Dollar) are especially at an advantage with experts seeing them being favoured by investors for yield and growth. Easing tensions between China and the US could offer a major boost to the Australian economy.
To ward off deflationary pressures and drive the economy, the Swedish Central Bank, Riksbank, resorted to negative interest rates in 2015. Since then, the Swedish Krona has depreciated 15% against the Euro. Negative interest rates have worked well for the Swedish economy. The country has the third-highest household savings rate globally, unemployment has declined, and inflation has risen to the 2% target. For the first time in 4 years, Riksbank raised the interest rate to 0% from -0.25% in December 2019. The bank has expressed a desire to go back to the old days when the repo rate was 5%. This could set a precedent for other countries in the Eurozone, like Denmark and Switzerland, which are still in the sub-zero territory.
The market outlook for pairs like the USD/SEK and USD/NOK remains positive for Q1 2020. Two factors are expected to drive them:
However, traders will need to look out for the US-EU trade deal. Washington will concentrate on that after it signs the first-phase deal with China. Any adverse decision could curb the upside potential of these currencies.
November 2020 will be crucial for the US Dollar, with the US presidential elections being held. A Trump presidency could spark fears of renewed trade protectionism and tension with the Middle East. In such a case, the US Dollar could strengthen as a safe haven currency. Candidate Elizabeth Warren, like President Trump, favours a low interest rate regime and managing the value of the US Dollar to boost American exports. If she comes to power, experts predict a decline in the US Dollar.
Experts predict greater geo-political turbulence in the run-up to the US presidential elections. This is why it will be useful for forex traders to closely follow any developments and, of course, the election results.
Regional currencies like the Polish Zloty, Hungarian Forint and Czech Crown are expected to decline in value against the Euro. Global factors, like the trade war and Brexit, have affected the regional economies. Economists expect that the Polish Zloty (EUR/PLN), which is the most liquid currency in the area, to lose 1.6% against the Euro due to rising inflation and a slowing economy. The Czech Crown is also likely to lose 0.6% against the Euro. Romania’s current account deficits and political uncertainty has led experts to predict a 3% drop in the value of the Romanian Leu (EUR/RON), against the Euro.
The entire region has been significantly affected by the slowing German manufacturing sector. Central European currencies are expected to suffer, despite a surge in the industrial sector in 2020.
While it isn’t a political event, 2020 is the Chinese year of the Metal Rat. The metal rat symbolises opportunities in finding love and earning money. So, traders who have been sceptical about getting into forex trading might consider doing so this year. In particular, people born in the year of the Ox are expected to find good opportunities in career and love this year.
The year will be rife with developments, which means traders should keep a close watch on the economic calendar before making decisions. Risk management tools like stop-loss and take-profit are vital as well.
