Effects of COVID-19 Pandemic and Oil Price War on the Forex Market – JP Markets

Effects of COVID-19 Pandemic and Oil Price War on the Forex Market

How long does a quarter in a year last? For 2020, the first one seemed a lot longer.

Three months into the year and it already feels like we’ve all aged faster. One day, news about a virus spreading through China broke out. The next day, people’s lives have been misplaced and our economy has been severely disrupted.

As the world faces grave threats from the COVID-19 pandemic, several experts are predicting its impact on the economy.

The virus, which originated from China, has now affected over 138,000 people worldwide with increasing cases every day. Among the countries hit the most are China, Italy, South Korea, the USA, and Iran – coincidentally some of the biggest economies in the world as well.

Covid-19 and Oil Price War Continue to Impact the Forex Market

The fear and panic that came with the pandemic caused an erratic market behavior. Most asset classes were repriced and the Foreign Exchange (FOREX) market is not an exemption. Given its risky nature, Forex trading has remarkably slumped down simply because there is not enough liquidity to demand large-scale trading.

This drop in the market can also be traced to the recent oil price war between Saudi Arabia and Russia. Although oil prices have already fallen at 30% since the year started, its major drawback happened in the midst of COVID-19.

On March 8, 2020, a price war was declared over the proposed oil production cost. The next day, the global stock market crashed for the first time since 2008.

It triggered a major plunge – with US oil prices falling by 34%, crude oil by 26%, and brent oil by 24%. As the currency for invoicing and settlement in the international oil market, the USD depreciates when oil price increases, and vice versa.

To illustrate, here are the performances of major forex currency pairs as of February 21, 2020:

  • EUR/USD – the euro/dollar is down 0.20% for the year-to-date
  • AUD/USD – the Australian dollar/US dollar is down 5.67% for the year-to-date
  • GBP/USD – the British pound/US dollar is down 1.47% for the year-to-date
  • USD/ZAR – the US dollar/South African rand is up 12.87% for the year-to-date
  • USD/RUB – the US dollar/Russian ruble is up 10.66% for the year-to-date
  • USD/KRW – the US dollar/Korean Won is up 3.16% for the year-to-date
  • USD/BRL – the US dollar/Brazilian real is up 14.96% for the year-to-date

Aside from the US, several countries also rely on oil export-import balance. Oil trades make up major portions of a country’s GDP and oil fluctuations fuel economic growth and development.

As oil becomes an increasingly sensitive topic right now with the recent pandemic, OECD warns the public that COVID-19 might be the gravest threat to the global economy since the 2008 financial crisis.

What’s Next for 2020?

The future remains unknown but there are telltale signs from today’s happenings. For one, the unprecedented spread of COVID-19 will surely open discussions on systems and industries. Perspectives on health care will shift, sanitation practices will be enforced, and the economy will be in need of a boost.

Economists are foreseeing a 2.4% fall in global economic growth for the whole year at best. If the pandemic remains contained and cases will significantly decrease, the world growth is expected to hit a sharp slowdown in the first half of 2020.

COVID-19 has dominated the world during the first quarter of the year. No one knows how long it will last but one thing’s for sure: We need to recover as fast as we can to prevent another crisis from happening.

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