FX Traders Should Brace For A Volatile Q2

The first quarter of 2020 was the worst first quarter in the 135-year history of the Dow and modern-day humanity is finally over. COVID-19 reared its ugly head in the last 3 months, hitting China first and then Europe and now the US. Stocks and commodities took the brunt of the selling with the Dow Jones Industrial Average losing more than 20% of its value and oil falling 60%. European stocks were hit hard as well, dropping more than 25% and in Asia, the Nikkei fell 20%. In a nutshell, it was a terrible month for stocks and a volatile month for currencies. Money flowed into the US dollar for safety but as the virus spread in America, the greenback gave up its gains as investors worried about the outlook for the US economy and questioned the Trump Administration’s efforts to help businesses and consumers survive. Today’s sharp decline in consumer confidence reflects the country’s deep-seeded pessimism. The consumer confidence index dropped from 130.7 to 120 in March.

In our world of major currencies, the Australian and New Zealand dollars lost the most this quarter, falling 13% and 11% respectively. The Canadian dollar also lost over 8% while losses in the euro were more modest at approximately 2%. Looking ahead, the second quarter won’t be a pretty one. Most world leaders have warned that business activity may not get back to normal until June. Schools in many countries will be closed for the rest of the term, leaving workers stranded to find childcare. We could be lucky and in a few weeks, the stay at home measures will prove fruitful and curve in the US will peak. At the same time, 5 to 15-minute COVID-19 tests will become readily available, helping to control the outbreak. However even if that becomes true, March releases come out in April which means that we’ll see the brunt of data weakness in April and May, starting with this week’s jobless claims and non-farm payrolls reports. The tug of war between weak data, Q1 earnings and COVID-19 headlines (positive or negative) should make for a volatile second quarter for FX traders.

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