When the coronavirus outbreak began at the start of the year, the FX market appeared unconcerned as the economic impact was expected to be limited to China. However, as the disease spread and the implications for global trade became clear, analysts became alert to the risk the virus posed for various currencies, creating a significant amount of market volatility.
Is the pound under pressure?
Sterling will be vulnerable if the global economy continues to slow down due to the outbreak. For now, Brexit is seen as a more pressing issue but the UK economy is dependent on global trade and a noticeable dip will have consequences for the pound.
Another issue is whether the disease can be contained in the UK. Cases have been reported and swift action taken to quarantine people who have been infected. An office in Canary Wharf sent 300 members of staff home as a precautionary measure after a staff member contracted the virus. While this helps with containment, if many more businesses are required to follow suit, it may have an impact on productivity. This will put further pressure on the economy during the crucial transition year following Brexit.
Compounding the euro’s woes
The coronavirus has had a more significant impact on the euro for a variety of reasons. The Eurozone is more closely enmeshed with world trade and has more extensive links with China, which means the slowdown has had a more significant impact. In addition, the economy is in a more fragile state compared to the US and the UK, which is already putting pressure on the central currency.
An outbreak in Italy led to 11 cities in the area on lockdown, with many businesses being forced to close. The expectation is that Germany will bear the brunt of the situation because of a halt in demand for cars in China, which is a major market, and the virus comes at a time when the economy is already struggling.
Relatively limited impact on the US dollar
At the start of the year, the US dollar remained unperturbed by the outbreak. The relatively positive performance of the US economy and distance from China meant that the US dollar has been outperforming a basket of currencies, including the safe haven Yen, which was marked down as investors feared greater risk in Asian currencies.
Now that the situation has impacted the stock market and there appears to be no hope of a swift conclusion to the situation, there is a possibility that Q1 results will see a decrease in the forecast annualised growth and could take a larger hit in Q2. For now, the US dollar is benefiting from the risk-on atmosphere in the currency market but there are no guarantees that it can maintain this position indefinitely.
Commodity-based currencies continue to struggle
Commodity-based currencies such as the Canadian dollar were among the first to feel the impact of the coronavirus. A decrease in demand for oil from China is having an impact on oil prices and that, in turn, is putting pressure on the Canadian dollar.
In Australia and New Zealand, the impact on trade routes and tourism was similarly immediate, which is causing currency weakness. In Australia, the domestic economy is already precarious due to the devastation of the forest fires and limiting trade at such a difficult time is adding more pressure to an already struggling currency.
What lies ahead for the currency market in light of the coronavirus?
There are a lot of variables to consider when looking forward. Containment of the disease is a priority, as is finding a vaccine but this second step will take time. Until the issue has been resolved, the coronavirus is likely to continue to cast a shadow. Some economists believe that there may be a rally of markets and currencies in Q2 as pent up demand gives economies across the globe a boost. However, this assumes a resolution which allows for trade and travel to resume.
At the moment, the currency market is operating with a high awareness of risk and the many variables in play. This may mean that that there could be further volatility in the currency market, with areas most effected by the outbreak seeing further pressure on currency values.