Should We Expect a FX Flight to Safety in July 2020?

Now that COVID-19 cases seem to be accelerated, there’s a wide debate on the US dollar and its ability to rise again as things can get worse. Some argue that since the US is handling the pandemic very badly, it could lag other nations. However, the performance seen in the past few days is starting to show funds flowing into the US dollar, meaning investors are looking for safety.

Risk currencies fading

The Euro, Pound, Canadian and New Zealand Dollar, all saw their upside capped against the dollar. The DXY or the US dollar index found support around 96 last week when it jumped following second-wave fears. A resurgence of funding pressures is excluded, for now, considering the Fed had provided ample liquidity. It is possible, though, that investors view the dollar as a safe haven, even though the pandemic is expanding rapidly in the US.

With more than 2 million cases and more than 125,000 deaths, it is by far the biggest hit nation on Earth and the prospects for the near term don’t look encouraging as multiple states see record-numbers for new infections and hospitalizations. Even the most-affected states don’t seem to want to impose strong restrictions, but the public confidence is severely altered by the negative developments with COVID-19.

Navigating the near-term

As we move forward, it is important to use online information better to trade FX efficiently. Most politicians seem to be downplaying the severity of the situation, in their quest to prevent another economic lockdown. However, epidemiologists and experts from the field had warned from the beginning of the year this virus will be around for a decent amount of time. FX traders should expect risk caution ahead, as long as infections will continue to rise. Even in the absence of economic restrictions, people will be reluctant to go out and spend money, which will delay economic recovery.

FX volatility to be elevated?

Even though central banks had been aggressive in flooding the markets with liquidity, reducing FX volatility, since March, most of the major currencies had been very active. This means a lot of opportunities for traders, but at the same time, it requires closer monitoring of the market’s performance. We expect FX volatility to be relatively-elevated in the near term, as long as the situation won’t take a surprising turn for the better. In such an environment, the US dollar is poised to be an outperformer, as investors will stay in cash until better market valuations and more positive prospects will start to show up.

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