The global economy is sick, not with the novel coronavirus that is gradually bringing the world to a halt, but as a direct result of it. The coronavirus health emergency has been driving market movements for some time now, with the first reported cases of what we now know to be COVID19 occurring in China in late December last year. By 23 January 2020, Wuhan city had been entirely closed off by the Chinese authorities and fast forward two months we find ourselves in a landscape where a quarter of the world’s population are reportedly living under lockdown.
This is an exciting yet turbulent time for forex traders. For those who experienced the staggered financial effect of the 2008 global financial crisis, this may seem an altogether more unpredictable situation as major economic decisions are being forced out of the hands of government treasury departments and refocused towards creating huge public relief funds. Trading well in this unstable environment surely means more than simply giving a much greater weighting to EMA than SMA figures, but what trends and opportunities have traders already seen and what can we expect going forward?
How have currency markets reacted to the coronavirus?
One only needs to look to the effect that coronavirus has had on China to understand that the financial markets are contending with more than a once-in-a-while shakeup. The country described by Dutch banking corporation ING Group as the “engine of global commodities demand” has witnessed a major shutdown of factory work, industrial production, travel and even the cancellation of NPC/CCPCC meetings (the legislative assembly of the Chinese Communist Party).
As other nations begin to follow suit, the markets have responded with a degree of aggression that has seen the generation of opportunities across the many currencies that are directly affected (and even those that, as yet, are not). To understand the key movements, it’s necessary to look towards some of the foremost factors that have made this outbreak a forex market fundamental:
- The impact felt by commodity markets, causing a ripple effect within all commodity currencies
- The constant global developments that are leading to 24/7 volatility.
Commodity market influence
In China, the radical changes to what is usually a highly industrious global hub are at least partly responsible for the impact that has been felt by the commodity markets – and all commodity currencies have been influenced as a result. Figures from the IMF suggest that China usually consumes around 20% of non-renewable energy sources and a huge 40% of base metals. The country’s use of raw materials dwarfs most other nations, both developed and non-developed, contributing to a substantial short-run impact on the prices of commodities whenever there is a shock to aggregate activity in China. The coronavirus pandemic can certainly be counted as such a shock, with Chinese exports down by 17.2% from 2019 (as reported by Time), and even the omnipotent Apple stopping production.
Whilst other global producers are being drawn into the coronavirus crisis, we can expect substantial further movement of commodity markets, and of dependant currencies as a result. As reported by Bloomberg on 8 March 2020, Saudi Arabia intends to drive the production of 10 million barrels of crude oil and so, whilst they are now suffering from their first COVID19 cases, there are signs of fluctuation in both directions. This economic fightback has been replicated in China, too, where Foxconn Technology Group have announced that Apple assembly line staff are returning to their factories in great numbers.
Traders looking to take advantage of currencies that are pegged against industry and production may wish to explore commodity currencies throughout Spring 2020. The Canadian dollar in particular is linked to crude oil, as the nation plays host to the largest deposits of black gold outside of Saudi Arabia or Venezuela. With decisive action taken by the Bank of Canada to shore up the economy with an interest rate cut of 50 BPS on 6 March 2020, CAD is cheaper and more competitive than traders are perhaps used to.
Pairs to watch:
USD/CAD – with a clear correlation between the Canadian currency and crude oil, look out for movement in both directions as oil production shifts.
AUD/USD – as the most abundant coal and iron exporter in the world, AUD is heavily dependent on global industry (and raw material markets) but may experience a resurgence as investors flock to the safe-haven of gold.
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News cycle volatility
Although it is impossible to accurately determine where the news cycles will go next, it is fairly clear that the world is in the grip of a downward trend. Economies are largely shutting up shop, particularly now in the Western Hemisphere as coronavirus ravages its way across Europe and sees a dramatic spread throughout the US.
As global travel grinds to a government-mandated halt, money is simply less mobile. Many investors are now adopting a risk-off approach that is understandable given that even FTSE 100 trackers are down by 31 percentage points from just a month ago. In terms of currency, the US dollar broadly remains the most traded within the forex market, as investors react to the risk-averse sentiment that the pandemic has brought about. The dollar’s pairing with the safe-haven Japanese Yen could see an interesting battle for the title of top risk-hedging tool over the coming months, and there is now greater volatility between USD/JPY than was recorded in July 2019 after the Federal Reserve rate cut.
Elsewhere, the coronavirus pandemic and the collapse of oil prices have made emerging market currencies particularly vulnerable. With investors becoming more risk-averse, there has been a dramatic sell-off which matches the pace of depreciation seen during the 2008 global financial crisis, according to JPMorgan. Key currencies to watch in this space include the Mexican peso (MXN) and the Russian rouble (RUB), which have fallen 15-20% against the dollar during March 2020.
Pairs to watch:
AUD/NZD – the often-touted “risk-neutral” pairing may experience some turbulence as New Zealand begins its own fight with coronavirus, despite a positive stance from Adrian Orr, Governor of the Reserve Bank of New Zealand.
USD/JPY – as mentioned, both the US dollar and Japanese Yen remain well traded despite the outbreak and are vying for a position as the market’s preferred hedging currency. Keep in mind, however, that the US coronavirus stimulus package has yet to be fully realised and the election that is due in Q4 of this year could rock the boat further.
What will follow the coronavirus?
Even without the turbulence of a global pandemic, there are lots of factors that forex traders will want to watch and account for as we move past this unfortunate episode in history. Trading across the board is feeling the bite of current events, and in a time where orange juice futures are the ‘best performing’ asset well into the first quarter of the year (as reported by the BBC, 26 March 2020), there are clearly both opportunities and some major threats to consider.
Despite news of the pandemic taking centre stage, the US conflict with Iran continues and has the potential to affect the currency market not only in the event of targeted action by either side but also through manipulation of commodity currencies – particularly those involved in oil.
Back on the other side of the pond, the extremely protracted Brexit trade negotiations are likely to pick up steam once more in the second and third quarter of 2020, bringing about a further period of instability for the EUR/GBP and GBP/USD pairs.
Where does this leave us?
Whilst the future status of medical care is proving hard to predict even for seasoned healthcare professionals, the combined effect of the financial measures that have been put in place to stem the spread of coronavirus are slowly building a picture of what is to come. As Bruce Kasman, Chief Economist at JPMorgan puts it:
“There is no longer doubt that the longest global expansion on record will end this quarter. We now think that the COVID-19 shock will produce a global recession, as nearly all of the world contracts over the three months between February and April”.
It’s clear, then, that the global economy is in for a beating. Kasman’s team predict that the unemployment rate in developed markets will rise 1.6 percentage points in the next two quarters alone – a direct reflection of the loss of jobs and weakened economy that we can now expect. What effect this will have on the currency markets, only time will tell.
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