Undeniably, the global pandemic has been harsh on the entire world. Even 12 months later, several industries are suffering from the consequences propelled by the deadly Covid-19 pandemic. The interest rates and inflation have been decreasing consistently, making imports cheaper.
People have started demanding more foreign currencies, due to which local currency values experienced a sharp decline. But fortunately, things are changing in 2021.
The post-pandemic recovery through regressive fiscal and monetary policies is helping stabilize exchange rates. The interest rates in the United States are trending higher, strengthening the currency.
Also, Joe Biden’s stimulus package is likely to increase inflation, allowing investors to move back their assets. It does reflect a positive outlook for the US, but this is negatively affecting the currency markets in other countries.
Investors in developing countries like Malaysia, Pakistan, Paraguay, and Samoa are heavily investing in US dollars, depreciating the value of ringgits. Precisely, the forex market has been volatile lately, and if you wish to learn about these changes, keep reading.
Here are the five ways how forex trading is changing in 2021.
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1. Bullish Outlook
Previously, the forex market was solely dependent on technical forecasts. Now, since the market has a bullish outlook, investors can implement new trading strategies.
Firstly, they can take advantage of locational arbitrage. It is the practice of buying currency at one location and selling it to another. These are short-term gains since the investor takes advantage of the gap in the market prices of currencies.
With huge fluctuations, this is possibly the best time to invest money in the forex markets. You can get in touch with a forex trader in your region to start trading. If you reside in Malaysia, search for the broker forex terbaik to get in touch with an experienced dealer.
Including local words will allow the search engine to find more specific results. However, before putting all your money at stake, discuss your risk appetite with the broker. The bullish outlook is increasing individual investments, which means you can capitalize on the declining value of the US dollar.
2. Growing Market Uncertainty
Currently, the policymakers are dealing with the impact of deflation; meaning, it is becoming difficult for them to stand against stable currencies.
Therefore, the government is deciding to move precautionary USD holdings into emerging markets. It will weaken the dollar against other currencies, allowing developing countries to achieve a stable inflation rate.
Moreover, these volatilities are likely to push the commodity prices. Canada’s recovery in oil prices is expected to strengthen its currency against the US dollar. Similarly, the Colombian Peso and Korean Won (KRW) are likely to perform well by the end of this year.
Hence, take advantage of these market uncertainties and buy currencies that have the potential to appreciate in the long run.
3. The Three-Year Diversion
The global financial and forex markets are striving to regain investor’s trust. The ending of Trump’s protectionist policies will likely help the global currencies, but the three-year diversion has made investors skeptical. Biden is likely to return to a rule-based international order to achieve more balanced growth. But again, these policies and changes drive down to public debt burdens for the developing economies.
The best way for developing countries to strengthen their currency is by pushing the inflation rates. With increased price levels, the demand for imports will decline. As a result, the need for foreign currencies will decrease automatically, appreciating the ringgit’s value.
4. Decreasing Interest Rates
In developed countries, the interest rates have decreased to zero, encouraging people to borrow money. The government takes such initiatives when the economy is suffering from a recession. The lower interest rates increase investment activities in the economy, encouraging more people to borrow money.
It increases the demand for currency, appreciating its value. Low-interest rates also convince investors that economies are back on track, opening doors to trading activities.
However, developing countries haven’t been able to push the interest rates to zero because of high poverty rates. As a result, investors have been borrowing funds from developed countries.
For instance, if the US is giving loans at 2.5%, the trader in Malaysia will prefer borrowing money from the bank of America.
You might think there isn’t anything wrong with this, but such transactions have a cripple-down effect on the economy. The demand for dollars will increase in Malaysia, depreciating the ringgit.
5. The Rise of Carrying Trades
With changing forex dynamics, trading activities are also evolving in 2021. Now, people are switching to carry trades. It is a trading strategy that allows people to borrow at a low-interest rate and invest in assets providing a higher return.
Therefore, people look for countries with a low interest rate to borrow money and countries with the highest interest rate to invest in assets. It leads to lower rates of forex rates because the demand for two currencies increases simultaneously.
Moreover, traders can capture the difference between interest rates, allowing them to gain from this leverage. However, this strategy is somewhat risky because the transactional charges on international borrowing can limit gains.
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The global policymakers are aiming for reflation in 2021. If they achieve this goal, the position of the dollar will weaken, strengthening other currencies.
Therefore, instead of heavily purchasing dollars to have strong financial backing, people should start selling them. It will increase the demand for ringgit while improving the forex’s position in the economy.
All in all, investors have to become more aware of market conditions before trading in foreign exchange markets.