Coronavirus And Its Impact On World Currencies As Covid-19 Nears Pandemic Status – Exchange Rates UK

– On Wednesday, the US dollar is mixed

– The Swiss Franc is a modest out-performer and the Euro is firm again

– The Pound Sterling is under-performing

– The Indian Rupee is performing best in the Asian currency block with the Malaysian Ringgit steadier.

– The Chinese Yuan is flat but the Korean Won has weakened

– The Mexican Peso is soft

Coronavirus fears have continued to dominate markets this week with emerging currency exchange rates particularly badly hit as risk appetite has slumped

Latest data from China has reported further cases in Wuhan, although there have been very few new cases reported outside the province, boosting confidence that the outbreak has been contained, and China is making further attempts to normalise conditions.

There has, however, been a jump in global fear as the number of cases outside China has increased and the spread has widened sharply.

There has been a particularly virulent outbreak in Northern Italy with over 300 cases and 11 deaths while the number of cases in South Korea and Iran has also increased further to 1,261 and 139 respectively.

The increase in cases has driven fears of a global pandemic and comments from the US Centre for Disease control and Prevention triggered further selling across markets.

Anne Schuchat, principal deputy director of the CDC, told reporters at a news briefing. “It’s not so much a question of if this will happen anymore, but rather more a question of when this will happen and how many people in this country will become infected and how many of those will develop severe or more complicated disease”.

Equity markets have declined very sharply over the past two days and commodity prices have remained under pressure. WTI is trading at 13-month lows and copper close to 3-year lows.

“Markets had been under-estimating the risk of coronavirus but I think that phase is over by now,” said Tatsuya Chiba, manager of forex at Mitsubishi Trust Bank.

According to Chiba, the risk-off mood is likely to linger for another month or so until markets reach the extreme by over-estimating the risk”.

There has, however, also been a shift in US interest rate expectations with Fed Funds futures indicating over a 30% chance of a rate cut at the March meeting and 90% chance of a cut by the end of July. The 10-year yield has also declined to record lows near 1.30%.

In a tweet, Marc-André Fongern, head of research at MAF Global Forex, commented that:

The virus is now increasingly becoming an almost incalculable global risk, i.e. in case the rate of new infections in the US actually rises noticeably, the Fed may be forced to consider lowering interest rates in order to alleviate the downside risks for the domestic economy.

The shift in US yields and expectations of Fed Funds rate cuts will offer an element of protection to major and emerging-market currencies against the US dollar.

Which Currencies are Most Impacted by Global Panic-Selling?

Commodity currencies have still been subjected to fresh selling with the Australian dollar inevitably a focus and AUD/USD has declined to fresh 10-year lows at 0.6570.

The biggest losers have been concentrated in emerging markets, especially those countries which are oil exporters.

The Russian rouble and Mexican peso have both declined 3.3% over the past 5 days while the South African rand has lost 2.3%.

Within Europe, the Norwegian krone has been the biggest loser with a 2.1% retreat.

With the Japanese yen securing a reprice, the Australian dollar has declined 2.4% against the Japanese yen.

Currency analysts at Scotiabank summarise by saying, “the USD is mixed on the day; the CHF is a modest out-performer and the EUR is holding up well again; we think the EUR’s recent form has been driven mainly by short-covering as EUR-funded carry trades are unwound amid the spike in market volatility.”

“The GBP is under-performing on the session on little new news. Asia FX is mixed; the INR is out-performing on the session and the MYR is steadier.

“The CNH is flat but the KRW has weakened again, dropping 0.5% on the day. Weak risk appetite is keeping the MXN tone soft, with USDMXN holding just below its 200- day MA (19.21) still. There are no major data reports today so markets will continue to eye equities as the weathervane for risk appetite and the FX market’s direction.

“More broadly, we think price action in the USD overall in the past two week suggests that its early 2020 rally may be stalling – and reversing.”