Before you even read the article, we’re going to give you the answer – is it both No and yes!
No, because the Forex trading market does not crash entirely, and yes because only specific currencies can crash in the global market at any time.
Crashes in the Forex market are entirely different from the ones in the stock market. They actually affect the specific currency drastically. For instance, the Swiss Central Bank managed to unpeg the Swiss franc from the euro. After this incident, the franc soared and took down the currencies, which was termed as the flash crash. A similar event had occurred recently in 2019, with the Japanese currency Yen. The money crashed overnight to another flash crash and also down the value of or instead of the value of every currency.
What exactly causes currency crashes?
Since we’ve already established that the Forex market, cannot crash entirely, but crashes the individual currencies in the market from time to time, hence, we thought you must know the reasons behind these timely currency crashes.
Firstly, let’s understand that there are mainly two types of crashes – long-term crashes and flash crashes.
Long terms ones, last for many months or even years, while the latter like noted above, occur in seconds or the longest can lasts for a couple of hours. Regardless of the type of crash in the market, the investors that are involved in these currencies suffer significant long terms losses, when this takes place.
Long term crashes are generally occurring in the social-economic cases in a country, for a longer duration of time. They usually happen in a country that faces a lot of economic and monetary crisis, hyperinflation or even significant financial challenges.
Flash crashes, as mentioned earlier, lasts anything from seconds to a couple of minutes. The Japanese Yen flash crash that took place in 2019 lasted for 8 minutes and brought down the currency value of most of the currencies by 3% to 5% and the USD up to 8 times. Although this crash was very short-lived, it still managed to damage the orders and the orders hit for a majority of the people. Some experts, after thorough research on the topic, documented that this loss happened in the witching hour between 17:00 -18:00 NYT, which is when the liquidity of the market is at its lowest, and the Japanese markets are not yet open.
Although crashes frequently occur in the foreign exchange market, it is imperative to note that the flash crashes are not new in the FX market and sometimes, cause a significant amount of damage to the people and the investors in the market. However, the entire market in itself cannot crash. One way to overcome this is to make use of proper strategies and risk management facilities to overcome these kinds of crashes in the future.