Recoup of 2020 in financial markets and outlook for 2021

The outgoing year 2020 could become a year of battles in the financial markets. First and foremost, the trade war between the US and China was supposed to be the highlight of the year. Then, analysts predicted great difficulties for the commodity market and Big Tech’s lobbying activities ahead of the US presidential election. OPEC was expected to continue its shadow games. The ongoing crises in the Middle East could also be one of the main topics in 2020. This year, there was even a war between Armenia and Azerbaijan. The countries again clashed over Karabakh. All these events could have been on the cover of The Times. However, during this year, one event has dominated all the front pages - the COVID-19 pandemic. Though it is not a financial index, its impact on all markets across the world is profound.

COVID-19

In 2020, the coronavirus pandemic became the main event that shaped the trends in the financial markets. It was the crucial factor that made all the investors succumb to its influence when making trading decisions. Some did it greatly, others suffered losses. Neither retail and institutional, nor experienced and novice traders could react to changes in the market properly and on time. They hesitated and thus missed the moment when long or short positions should have been opened or closed. Metaphorically, they all were in the same boat struggling to survive in the severe storm in the middle of the deep ocean. The first wave of COVID-19 in March made some traders noticeably richer. Technical analysis was useless as it was impossible to find historical data in the trading platform for the year of 1918 when a similar case occurred, i.e. the Spanish Flu pandemic broke out. In such conditions, fundamental analysis came to the fore. It could at least somehow help traders enter the market in time. Moreover, speculators actively used mathematical forecasting models applied not to currency exchange rates but to statistics on the spread of coronavirus in certain locations where particular currencies were traded — Europe (EUR), the United States (USD), Sweden/Norway (SEK/NOC), as well as in Russia, Brazil, Indonesia, South Africa (emerging markets). In autumn, the second wave of COVID 19 hit the globe, so traders carefully monitored the news and made their decisions on a certain currency keeping track of achievements in the COVID-19 vaccine development. Those who traded the US dollar made a solid profit and incurred serious losses simultaneously on Donald Trump’s promises to start mass vaccination in the near future. Notably, investors who have meticulously studied the market movements during the pandemic feel more confident now when opening a position. A 9-month period is enough to nurture more than one strategy. Therefore, in 2021, the havoc caused by COVID-19 is likely to be less devastating. It means that more traders will be able to earn but not lose. Yet, making a fortune in one lucky move will be much harder.

USD and new US president

The news on the US presidential race managed somehow to eclipse the coronavirus havoc. The investors whose portfolios mostly consist of US dollars were bracing for a hard time, while others preferred just sitting on the sidelines. As a rule, the greenback is vulnerable to any kind of political crises, and November 2020 was supposed to bring high political uncertainty. No wonder, the US currency started weakening amid the first reports that the election would not go smoothly. When Trump made calls to "stop the count", it became even clearer that the US political crisis was inevitable. However, as soon as Wall Street tycoons scored big gains on a weak dollar, the political crisis in the United States eased and the US dollar recouped some of its losses. Donald Trump acknowledged his rival’s victory, so concerns about the political crisis faded away. Currently, everyone is focused on Joe Biden’s future policy towards the local and foreign commodity markets and projects, as well as trade relations with Beijing and Moscow. Besides, market participants are curious to learn about Biden’s first steps in relations with Saudi Arabia, Turkey, Iran, and other countries. As for the US dollar’s prospects in 2021, experts say that unlike Republicans, Democrats resort to more effective approaches to keep the national currency stable. For this reason, investors whose trading portfolios include USD should be poised for sharp ups and downs of the US currency.

High demand for risky asset

The end of 2020 was marked by another trend in the foreign exchange market - the growing popularity of risky assets, e.g. emerging market currencies among medium and large traders. Surprisingly, investors showed an interest in the rupiah, real, ruble, lira, and other currencies that are usually neglected. The reason for such an uptick is not only the hope for the COVID-19 vaccine creation but also the US dollar’s prolonged decrease. Traders say that there are usually two alternatives to the US dollar: either safe-haven assets such as CHF or risky assets. The fate of the emerging market currencies in 2021 will depend primarily on whether the third wave of the COVID-19 will hit the markets or not and what will be the reaction of the US dollar.

COVID-19 to impact markets in 2021

The coronavirus pandemic may remain a pressing issue in 2021. The third and subsequent waves can significantly change the situation in all financial markets, including Forex. The prospects for the vaccine development are vague and the antibodies last for only 3 months. Such uncertainties may trigger high volatility. If someone did not like the year of 2020 in terms of the financial markets’ behavior and their earnings, then the only hope is herd immunity. If this is the only way out, the COVID-19 pandemic will end only as the Spanish Flu did. Then, we will only remember about the coronavirus outbreak when trading from election to election, from one mortgage crisis to another one, from the publication of US jobs data to a new employment report exactly as it has been before 2020.

Safe-haven currencies as perfect alternative for risky assets

Despite the coronavirus storm, some currencies managed to remain a сalm harbor throughout 2020. For instance, the Swiss franc can rightfully be called the safe-haven asset of the year that has weathered the storm. The majority of traders around the world who were unwilling to try their luck in new circumstances simply transferred the lion’s share of their assets to a stable franc. That was a wise move. They safeguarded themselves from big losses and even managed to earn a little bit. Importantly, gold managed to become one of the most popular safe-haven assets in 2020. Yet, such a turn of events was hard to predict.