Downside Risks for the FX Market During the Summer

The currency market seems to have stabilized following the shock created by the coronavirus pandemic. Although that provided some short-term relief, the current stability is very fragile and could be dampened in case new negative events will occur. If you want to know what are three of the main factors which could spark a new risk wave during the summer, stick till the end of the article.

# Second coronavirus wave of infections

Historically speaking, pandemics come in waves and that had been the case is the last similar situation, which occurred in 1918. The Spanish Flu was one of the deadliest outbreaks in history, killing tens of millions of people during three infection waves. What’s even more concerning, though, is that in the second wave was five times stronger than the first, which makes experts fearful about what might come next with COVID-19. The good news is that economies are now opening up, but as people interact with each other, the risk of new infections increases. Some countries like Australia or New Zealand might be favored due to their geographical locations, however, that’s not the case for Asia, Europe, North and South America.

# Resurgence of funding stress

Central banks had been successful in flooding the markets with liquidity and negating short-term deflationary pressures. Risk currencies have rallied and the US dollar eased lower, but traders need to understand how the financial system works. All money is loaned into existence and this means the measures enacted by central banks have provided relief in the short-term, but at the same time, had increased the future demand for cash.

Financial companies, private entities, and governments will find themselves in a difficult position when refinancing the debt, especially if we consider that revenues will fall due to the economic downturn which had already started.

# Geopolitical shifts

It was inevitable that big economic powers would have treated this situation as an opportunity to meet their agendas. In the spotlight right now we have the United States and China, the two largest economies of the world, which are now at each other’s throats on the birthplace of the coronavirus, as well as in terms of the dominance in the global scale. The US wants to preserve its dominance while China is seeking to expand its influence at least in Asia, a process expected to be volatile along the way. As the world order starts to change, financial and economic impacts will not fail to appear. s

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