Analysis

After Black Monday Is Forex Volatility Here to Stay?

2020 has brought increased market volatility, but can we count on it for the long-term?

The beginning of this week started with a flash, crash, and a bang, with the so-called “Black Monday” wreaking havoc on the currency markets. Although yesterday brought back volatility into the foreign exchange (forex) markets not seen in years – is it here to stay?

2019 was a difficult year for brokers, with low trading volumes weighing heavily on brokers. In fact, low levels of volatility have plagued the FX markets for some time now, with the industry not seeing serious levels of volatility in years.

Before the events of yesterday, volatility was picking up in February, with coronavirus being a contributing factor to this, alongside other factors. Because of this, many brokers have been reporting solid, even record trading volumes in February.

On the weekend, the coronavirus situation worsened with too many cases and outbreaks to count. This, combined with the current oil war between Saudi Arabia and Russia, which has resulted in falling oil prices, created the huge price swings on Monday.

Will 2020 deliver more trading opportunities than 2019?

Although yesterday’s movements aren’t likely to be sustained, it has sparked hopes that volatility might be returning to the forex market, and with that, increased client activity and, therefore, stronger trading volumes. But can we count on this for the long-term?

Filip Kaczmarzyk of XTB
Filip Kaczmarzyk, Head of Trading Department at XTB

Speaking to Finance Magnates Filip Kaczmarzyk – Member of the Management Board, Head of Trading Department at XTB believes that we shouldn’t be getting ahead of ourselves.

“There hasn’t been ‘serious’ volatility in FX markets for a couple of years now. I am afraid that what we see right now is just a short term exception and it is going to revert to the average levels in the coming months,” he explained. 

Kaczmarzyk explained that volatility would move away from FX to more ‘exciting’ instruments, which offer better return vs. risk for traders. This is because the currency markets haven’t been producing as sharp movements as they had previously. For example, non-farm payroll announcements haven’t recently been providing as much activity in the currency markets as they had in the past.

ATFX MD: Volatility will last for a few months

Wei Qiang Zhang of ATFX
Wei Qiang Zhang, Managing Director of ATFX UK

Wei Qiang Zhang, ATFX (UK) Managing Director, however, believes that current heightened volatility will last, at least for a few months.

“These conditions are set to prevail, for a few months at the least, especially as they were triggered by events that are yet to be resolved. The global coronavirus outbreak means that many countries are currently fighting the virus, and it’s made investors jittery, hence, the current market volatility,” he told Finance Magnates.

Charalambos Pissouros of JFD Bank
Charalambos Pissouros, Senior Market Analyst at JFD Group

Charalambos Pissouros, the Senior Market Analyst at JFD Group, said to Finance Magnates that this year has the potential to be more exciting than 2019.

Yes, increased volatility is good for the FX world, but I wouldn’t characterize exceptionally high levels as improved market conditions, as extremely volatile swings can easily wipe out trader’s positions. Generally speaking, though, I do believe that 2020 could be a more volatile year than 2019, providing more trading opportunities.”

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Can we avoid a summer lull?

Historically, the summer months are where FX volatility goes to die, with many people going on holiday during the middle of the year. As Finance Magnates reported, many trading providers and exchanges experience lower trading volumes, especially in June and July, during the summer lull. But with coronavirus not looking to disappear any time soon, could we avoid a similar downtrend this year?

“It is difficult to forecast what the summer brings, especially as we have no clue which way the coronavirus epidemic goes. Basically, we have no idea what tomorrow is going to bring. I would assume that due to the virus, both summer and the whole of 2020 might be interesting from a trading perspective,” offered Kaczmarzyk.

Market panic likely to continue

Pissouros added that he believes that market panic may continue for a few more months, which could offset the summer lull, due to there being no signs that the virus could be contained soon and no vaccine on the horizon.

“There is heightened uncertainty on how serious the economic wounds could get, and, in my view, it would be premature to assume that everything is already priced in,” he continued. “That said, I do expect volatility to be lower than now. Even with travel bans and domestic-level restrictions, some investors and traders may still opt for summer holidays, even if that means staying at home. So, net-net, volatility may be higher than last year, but not as high as it is now.”

Wei Qiang Zhang from ATFX, however, believes the answer to this question is a solid yes.

“The answer is yes,” he said. “The market conditions we’re currently witnessing are not normal; fund managers are going to want to take advantage of this high in volatility.

“We rarely see such a mix of major events unfolding at the same time; the number of opportunities will increase for Forex and stock traders. Therefore, I don’t expect to see the traditional summer slump. Plus, it’s an election year in the US, volatility will likely persist up to November even if other major triggers are resolved.”

Volatility might be more foe than friend

Looking to the long-term, what type of events will likely keep the FX markets active? According to Denis Golomedov, CMO at RoboForex, coronavirus will keep traders on edge for quite some time.

Denis Golomedov of RoboForex
Denis Golomedov, the CMO at RoboForex

“…the markets were affected by the coronavirus, and we must admit that the story is not over: it will require at least six months for the countries to take it under control. Six months later, the influence of the virus on the economy will also become obvious, and it will not be pleasing,” Golomedov outlined. 

“So, market circumstances cannot be called comfortable at all. If global economies, indeed, reflect the decrease in the GDP and other key macroeconomic parameters (which is really probable), the indices and assets will slump into a long downtrend. The volatility here will be more of a foe than a friend.”

2020 is going to be a busy year

When speaking on what we can expect for this year, Pissouros summed it up by saying that 2020 is going to be a busy year with coronavirus, Brexit, the Olympics, the United States elections, and more all likely to cause waves in the currency markets.

“We are dealing with the virus situation right now; nobody knows how and how soon it is going to be dealt with,” he highlighted. “Of course, once we’ve handled the epidemic, there will for sure be the aftermath, which will probably bring more volatility. Last but of course not least, we have the US election in November, and we all remember how the markets reacted the last time.”

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