Forex market during crisis
The Forex Market and the World Economic Crisis
The recent world economic crisis started in 2008, triggered by a liquidity shortfall in US banks after the collapse of the US housing market. The crisis then spread around the world, thanks to securitisation of sub-prime mortgages. Securitisation is where debt is mixed together and sold on as a new financial instrument.
Securitisation was supposed to reduce risk, but in practice it became impossible to separate good and bad debt and to understand the true exposure. This led to a loss of confidence in exposed banks around the world; some of them had to be bailed out to prevent an economic meltdown.
The global recession which followed caused high unemployment and declines in economic output. While most countries have now returned to anaemic growth, new crises loom. One of the most concerning is eurozone sovereign debt; Ireland, Portugal and Greece have already received massive bailouts, and others such as Spain and Italy are at risk.
Turbulent economic times cause volatility in the forex market:
- Confidence ebbs and wanes with every piece of news
- Panic selling occurs on both fact and rumour
- Central banks pour liquidity into the market to prop up currencies and financial institutions
Forex traders make money when currency values change, so today’s economic turbulence is an opportunity for profit. At the same time, market uncertainty creates additional risk:
- Long-term traders are less affected, as short-term variations tend to even out
- Short-term traders need to take particular care to avoid large losses
For forex traders, economic crisis is not a time for poverty, but for creating wealth. Take care, though; you want to end up a winner, not a casualty.