Just a few months ago, volatility in the forex market was near record lows. In late November average daily trading ranges in EUR/USD were as little as 20 pips, the lowest since the euro was launched 20 years ago. Today, in the midst of the coronavirus pandemic, volatility has returned to the forex market in dramatic fashion, with the type of swings last seen in the financial crisis of 2008.
Investors have flocked to the safe haven Japanese yen, which has rallied 5% against the US dollar between last Thursday and Monday, its largest three-day gain since 2008. On Monday the Japanese currency reached its highest levels against the dollar since late 2016. The Japanese yen’s safe haven appeal is in part due to Japan’s status as the world’s largest creditor nation. The Swiss franc and gold, the other foremost financial refuges, also reached multi-year highs earlier in the week.
Earlier this week the euro soared to its highest levels since January 2019 against the dollar. The move was fueled in part by dollar weakness due the collapse in US Treasury yields. The markets now turns its attention to the European Central Bank and its response to the coronavirus pandemic.
Oil prices suffered a historic collapse on Monday, after Saudi Arabia pledged to aggressively boost production and cut prices. The move came on the heels of Russia’s refusal to join an OPEC-led production cut. The news sent US oil prices crashing to $27.34 , the lowest levels since February 2016. Oil prices came under pressure again on Thursday after US President Trump announced a 30-day ban on travel from most European countries.
Currencies linked to crude oil plunged on the news of the price war between Saudi Arabia and Russia. This week both the Canadian dollar and Russian ruble have fallen to levels last seen in 2016. The Mexican peso also fell to multi-year lows.
With no clear resolution to the coronavirus pandemic in sight, further wild swings can be expected in the market. The old adage that 'volatility is a double-edged sword' applies now as ever. Greater volatility brings welcome opportunities for traders in the form of fluid trends but also presents increased risks.