Unprecedented Stock Market Volatility Creates FX Market Opportunity
March 11, 2020 11:09 AM
Trading opportunities and unique trends abound in the FX market, even when other markets are seeing their correlations increase dramatically
“May you live in interesting times”
Like COVID-19 itself, the above phrase purportedly originated in China before becoming commonplace throughout the Western world. While linguistic experts now believe the saying has no roots to China at all (unlike COVID-19), it’s still highly relevant to the current market environment. Seemingly a blessing, “may you live in interesting times” is actually more of a curse: life tends to be better in "uninteresting times" of peace and tranquility than in "interesting" ones, which are usually times of trouble.
Following an “uninteresting” year of low volatility throughout 2019, things have certainly gotten “interesting” for global stock markets in 2020. The rapid spread of COVID-19 from China throughout the planet is leading to massive health, social, and economic upheaval, driving global stock indices sharply lower in an unprecedented, coordinated fashion. On Monday March 16 alone, nearly every single stock in the S&P 500 fell on the day, while the broad index fell nearly -12%, its worst single-day performance in over thirty years. It took US indices a mere 20 days to fall from record highs into “bear market” (-20%) territory, by far the fastest drop on record.
In a crisis, stocks tend to move in lockstep with one another, eliminating the diversification benefit of owning or trading different types of equities. Whether an investor has owned a highly-cyclical cruise ship operator, a fast-growing technology stock, or a stable utility stock, they’ve all moved in a coordinated fashion in recent weeks.
Against this backdrop in the global equity markets, the FX market provides an opportunity for traders to diversify their positions. At the most fundamental level, FX traders don’t care about the absolute value of a currency, but instead its value relative to another currency. As each country employs different policies and strategies to address the fallout from COVID-19, FX traders can decide to buy the currencies of countries they feel are addressing the crisis effectively and sell the currencies of countries that may see more severe consequences. The two-way nature of the FX market, meaning that traders can buy a currency pair as easily as they can sell it, opens an entirely new, potentially uncorrelated world of opportunities to savvy traders.
As the chart below shows, the S&P 500 (green) has melted down since mid-February, but EUR/USD (blue), the world’s most widely-traded currency pair, has shown its own distinct trends, initially rising through late February and the first week of March before turning lower to create opportunities for bearish traders as well:
Source: TradingView, GAIN Capital
These trading opportunities and unique trends abound in the FX market, even when other markets are seeing their correlations increase dramatically. While we don’t know how long the health, social, and financial market distortions from COVID-19 will linger, wise traders should seriously evaluate the benefits of adding the FX market to their trading toolkit… after all, we’re clearly in unusually interesting times!
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.