Unprecedented Stock Market Volatility Creates FX Market Opportunity
Matt Weller, CFA, CMT March 11, 2020 3:09 PM
“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!
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