The USD is the world’s reserve currency and therefore should stay string during an economic recession. It’s definitely living up to that rule so far. However, some experts point out that this might not be the case for much longer. Be that as it may, for now the Dollar is strong and people are making use of it. FX markets are getting extremely volatile, which pushes people to seek ways to protect themselves. Hedging is getting increasingly popular and online payments are becoming more numerous.
FX Market Volatility During the COVID-19 Crisis
The US Dollar is largely protected from volatility during a recession because of its status as a global reserve currency. However, with the Fed’s reaction to the crisis, even the Dollar is put under pressure. As the Federal Reserve is cutting rates, the USD weakens against other major currencies. This, in turn, hurts exports of other countries, which are already hurt by the reduction in global trade because of lockdowns. And this might lead to the government pushing for currency intervention.
Meanwhile, the USD is strengthening in developing countries, especially those affected by the oil dispute in Saudi Arabia. This is what keeps the Dollar in a strong position overall, and what adds volatility to the global foreign currency exchange market.
This volatility, however, led to a record increase in FX trading volumes on specialized platforms. This resulted into a chance for smart traders to get better-than-ever USD exchange rates. One just needs to know where to look and how to use the solutions available to capitalize on this volatility.
Note that this state of the FX market is likely to persist for a while as the global recession gets worse. However, with the reduction in liquidity, FX trading will become challenging. Therefore, one should use the opportunity available right now.
How Do People Protect Themselves from Volatility?
Hedging is the tool that people and businesses use most often to get some protection from the volatility. Investing your assets in something that should be all but immune to rapid value shifts is always the safest strategy.
Moving to online payments is another way to get some security in these uncertain times. That’s because one of the advantages of using online money transfer companies for making payments is that they offer hedging as well. Therefore, you get a chance to protect yourself or your business from losing a lot of money if FX rates change overnight.
Hedging is, essentially, a way to secure the value of something. With foreign currency exchange, you will secure rates so that changes in the market don’t affect you anymore. This can be a good tool not only for protection but also for growing your wealth. For example, if you can secure the USD rate now, when it’s favorable, you can benefit from this when it inevitably changes in a year. Thus, you’ll have an edge that you can be sure of in the future.
Another method people use to protect themselves from volatility is investing in gold. This seems like a valid strategy as gold has been a good security asset for centuries. Recessions come and go, but the value of gold keeps growing. In fact, according to some predictions, it might go up from $1,700 to $3,000 by the end of next year.
However, with this particular crisis, gold might not be such a good idea for security. The problem is that the coronavirus recession decreased the buyer’s capacity dramatically. Simply put, many people just won’t have the money to keep buying gold.
Moreover, the output of the precious metal has decreased. That’s because lockdowns affected processing facilities as well. Therefore, there isn’t that much gold left to buy.
So, all things considered, hedging seems to be the better option. And FX brokers and money transfer companies are capitalizing on this. After all, banks aren’t very forthcoming in making FX hedging accessible. But with online money transfer providers, any client gets access to these tools.
How Are We Getting Better FX Margins Because of the Crisis?
Competition is the drive behind all business, and in this case it’s competition that’s indirectly benefiting customers. High FX margins are the reason why millions of people prefer online money transfer platforms to banks. Traditional financial institutions make foreign currency exchange expensive. However, such alternative platforms strive on making it affordable.
At the moment, when volatility makes FX markets both riskier and more appealing, lowering FX margins is essential for money transfer businesses. They have to do this in order to attract customers, who are growing fewer by the day.
After all, you shouldn’t forget that the crisis reduced global trade, remittances, and international real estate investment. Therefore, main groups of money transfer companies’ customers are diminished. Reducing margins is one of the few ways these businesses can use to actually stay in business. So one shouldn’t miss the opportunity the current crisis presents. If you have any need for FX trading, now is the time to do it.
Sources: forbes.com / reuters.com