2020 has in many ways changed the shape of foreign exchange trading (and the global economy as a whole) for years to come. It is important to know the current forecasts, upcoming trends, and the best future bets for 2021 in order to make the most effective investments.
How Has Covid-19 Affected Forex Trading?
The forex market naturally relies on worldwide trade between nations. The pandemic has led to a great deal of economic uncertainty, trade disruptions, and increased isolationism. Each country’s response to the pandemic will affect their domestic economies. This in turn will cause ripple effects across the financial world as a whole. It is one of the most complex issues faced by modern investors and it is ongoing.
There are several factors that further make forex more unpredictable than ever. One is the fact that there is no central marketplace for foreign exchange. This means there is less regulation. However, it is not always a bad thing, as several countries have used relaxed rules to help support foreign currency liquidity. Another factor is the relatively new nature of modern forex trading compared to traditional stock markets. Investors will have encountered certain problems for the very first time. The good news for forex brokers is now that they know how bad things can get, they will be better able to prepare for potential issues in 2021.
What We Can Learn From 2020
It is useful to analyze global capital flows to get a sense of just how extreme things have gotten in the past year. By July global GDP was expected to fall by 6%. This is forecast to further fall in the coming year. Popular predictions tend to range between 12% and 32%. Forex investors will need to prepare for this in advance in order to minimize potential losses.
Certain patterns seen in 2020 will continue into the next year. It is a good idea to look at graphs showing the fluctuations of a chosen currency. This will help to get a sense of when/why they lost value. If this year has taught us anything it is not to take risks. Markets are far too volatile to gamble on pairings that are too unpredictable. Instead, it is wiser to stick to ones that have remained reliably profitable even during the recent disruption. Safe-haven currencies are always a good bet when there are troubled times.
The following currencies are likely to remain the safest going into 2021:
- USD (US Dollar)
- KYD (Cayman Islands Dollar)
- GBP (British Pound Sterling)
- EUR (European Euro)
- CHF (Swiss Franc)
- CAD (Canadian Dollar)
Events That Could Affect The Market
There are several important political and trade events that will impact currency values around the world. The result and fallout of the US election will be particularly important. US-Chinese trade relations could affect the dollar. Since the Coronavirus pandemic is set to continue this will be one of the biggest factors in economic fall and growth. UK negotiations with the EU and the impacts of Brexit also play key roles.
The Rise Of Individual Investors
Across many sectors, recent developments have led to an increase in self-employed remote workers. Forex trading is no exception to this trend. It seems very likely that there will be a shift away from reliance on commercial or investment banks to conduct trading on behalf of their clients. Instead, there will be a trend for individual investments. This will lead to a growing number of self-reliant trading professionals. Such individuals can use the internet to self-teach themselves about forex brokers and the various ins and outs of the market. Armed with this knowledge they will no longer have to rely on third parties.
Speculative opportunities will remain, but people will be less inclined to trust large banks with their investments. This will be due to the aforementioned uncertainty which could lead to potential market crashes and losses. Therefore people interested in forex in 2021 will be much more likely to take trading actions into their own hands instead.
Forecast For 2021
If we look at a comparison of predictions from multiple institutions the forecast for 2021 looks particularly bleak for the GBP as it continues to recover after the UK government’s Furlough Scheme. This currency will be particularly fragile going into the start of the year. However, it is also one of the most widely speculated and as previously stated is fairly safe.
If there is a further global economic contraction, then EUR/USD trading will become vulnerable as well. Factors affecting potential rate gains will include the influence of the GBP and the overall risk of more economic disruption. If confidence in the Euro-zone continues then EUR will gain value. Investors should therefore keep an eye on upcoming political events and protective regulations within this region.
The overall consensus is that the Fed will not provide significant dollar support going into 2021. If the economy becomes more vulnerable there is a chance of bond yields being capped. Yield trends will almost certainly stay negative to an extent that goes far beyond that of recent years.
However, this consensus has been contested by a minority of banks. They believe that there will be medium-term growth for the dollar due to a lack of sustained euro support. If this becomes the case, then a euro/dollar pairing could be very lucrative. Regardless of which scenario becomes reality, the dollar will continue to be the global currency standard for investors.
Best Pairs To Trade
Despite the events of 2020 the best pairs to trade for forex brokers have more or less stayed the same. USD continues to reign supreme when it comes to paring it with other currencies. However, investors should also not overlook how well the Japanese Yen has fared this year.
Based on forecasts these are the best foreign currencies to exchange in 2021:
- EUR/USD (Euro/US Dollar)
- USD/JPY (US Dollar/Japanese Yen)
- GBP/USD (British Pound/US Dollar)
- USD/CAD (US Dollar/Canadian Dollar)
- AUD/USD (Australian Dollar/US Dollar)
- USD/CHF (US Dollar/Swiss Franc)
- NZD/USD (New Zealand Dollar/US Dollar)
- EUR/GBP (Euro/British Pound Sterling)
- USD/HKD (US Dollar/Hong Kong Dollar)
- USD/KRW (US Dollar/South Korean Won)
However, there is a caveat to choosing the Euro and British Pound Sterling. The pairing of these two currencies has become less lucrative since the vote to leave the EU and the pandemic. With Brexit deadlines looming investors should only bet on this pair at the right time. Knowing when to do so can ensure that they still make a tidy profit. Conversely, investing at the wrong time could prove to be disastrous.
Currencies To Be Wary Of
It is also crucial that investors are aware of the currencies that have faltered recently. Many of them are emerging market economies (EMEs) that rely on oil prices. They include RUB (Russian Rouble), BRL (Brazilian Real), TRY (Turkish lira), ZAR (South African Rand), and IDR (Indonesian Rupiah). In 2021 oil prices are likely to continue facing significant problems. It is therefore fair to say that these currencies will be risky bets.
There are exceptions to this. For instance, Bahrain’s wealth is dependent on petroleum exports, but the BHD has remained stable with the US dollar since 2005. There are similar currencies that get their value through oil yet have continued to remain strong even as the industry struggles. These include KWD (Kuwaiti Dinar) and OMR (Oman Rial). Furthermore, France is set to in 2021, potentially boosting not just its economy but that of all nations that use the EUR.
The JOD (Jordan Dinar) has been pegged with the US for two decades. However, the country is not economically developed enough to take the risk. The reduction in domestic economic activity earlier in the year suggests the JOD will be fairly weak going into 2021.
It is tempting to pair GBP with JPY based on their performances. The problem is that unresolved development due to Brexit may make this an unwise bet in 2021. Meanwhile, the CAD (Canadian dollar) and AUD (Australian dollar) are somewhat wild cards. They saw a drop at the start of the year but later rebounded. Their values have gone up and down frequently depending on different forex factors. However, their fluctuating values could be taken advantage of if investors can predict when they will rise. The Canadian dollar in particular is one of the safest bets because its economy is consistently stable.
Keeping An Eye On Ongoing Developments
The fact is there are no certainties when it comes to the forex market of 2021. Anything could happen. Perhaps a resurgence of Covid-19 could lead to even more extreme falls in the economy. This could destroy the economy of an individual nation, decimating its currency. This is a worst-case scenario, but as 2020 has already shown us, unexpected negative scenarios can occur without warning.
Luckily, we are not completely in the dark. It is possible to predict to some extent what will happen by keeping an eye on ongoing developments. This will allow investors to prepare for potential outcomes. For example, if the USA sees a surge in Covid-19 cases it is fair to say that USD will lose some value. The pandemic is not the only issue to follow in 2021. Political and border developments will also play a key role in the ongoing values of different currencies.