Global events can have detrimental effects on individuals’ lives and the livelihood of many nations. The financial sector is one area that is always greatly influenced by such occurrences. The forex market is vast and shows extreme volatility in various scenarios with a global economic, geopolitical or environmental impact.
Some multitudes engage daily in foreign exchange transactions. This kind of trading connects various nations and the interconnectivity in the foreign marketplace. Therefore, any international incident can have instant consequences and affect the exchange rates.
An example of such an international event is a political election. The country where the elections are taking place usually experiences the impact in various sectors, but the greatest is on the currency. The outcome is usually uncertain with any election, creating doubt and instability among traders. It inevitably results in a change in the country’s currency.
Then there’s the unexpected election. These usually occur when corruption is prevalent or imposed a vote of non-confidence. Depending on the situation, turmoil and protests can erupt among the population, which signifies political uncertainty and instability. Forex traders don’t fare well in the face of volatility, and subsequently, the currency is affected.
Natural disasters such as cyclones, earthquakes and tornadoes can significantly impair a country. The damage and loss incurred and the unexpected costs directly affect the country’s currency. Money that would’ve been used for strengthening the economy is now put towards rebuilding and restoring infrastructure.
Another global event identical to a natural disaster is a physical war. It shares similar negative impacts, but war can be devastating to a country’s economy. Those nations engaged in conflict are engulfed in a cloud of uncertainty, not knowing what the economic future looks like.
A current example of these conditions is the conflict between Russia and Ukraine. The currencies in the forex market have felt the shock caused by this clash, particularly the Russian rouble. Investors are struggling to determine the impact on the forex market with the increase in the price of energy products and the economic sanctions.
In response to the hostility between Russia and Ukraine, the US and other countries around the world imposed sanctions on Russia in an attempt to weaken Russian powers. Some, like the UK, decided to freeze Russian banks’ assets, and global cash transfer systems announced a halt in serving Russian customers. Restrictions accelerate with an increase in tension, and they have led to a massive drop in the rouble and other currencies linked strongly to certain commodities.
The Euro also declined but improved in early March 2022, almost reaching 1.1000 in EUR/USD terms attributed to the new EU fiscal boost. According to the FX Board G10 and CNH Trend Evolution, the US dollar has remained relatively stable due to the country’s lack of connection to Russia in terms of trade. The British pound has steadily decreased due to the oil and gas imported from Russia, which is insignificant on a large scale but has nevertheless managed to impact the currency.
There are options to consider during these uncertain times to ensure you safeguard and wisely diversify your portfolio. Bonds are something that you could keep in mind, especially long-term sovereign ones from the US Treasuries and German Bunds. Another alternative is to use currencies such as the US Dollar, Japanese Yen, and the Swiss Franc as a haven.
Many may feel tempted to sell their investments, but choosing the right time to do so can be tricky. An alternative would be to convert part of your portfolio to cash, although it may reduce your capital’s purchasing power.
In times like these, diversifying your portfolio may be a good alternative, especially when considering different geographical locations and sectors. This reduces the possibility of loss if a global event does occur and impacts different regions differently. The same applies to commodities – focus on a broader range and avoid placing all your eggs in one commodity basket. Finally, during this turbulence, cybersecurity and defensive stocks are other options with potential upside.