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Into the Storm; COVID-19 effects on the Forex markets

19 Mar 2020 12:21 PM

With global stocks market collapsing and entire economies going into lockdown, many are wondering how much worse this crisis can get and how long it will last. In a nutshell, the situation could probably get even worse before seeing the light for both the economies and the financial markets. Hence that most of Europe and the US are still far from the virus peeks numbers. Ultimately, this shock will subside and given the overwhelming stimulus measures lately, the market rebound could be sudden. However, we might be months away from that point, and for now, safe haven products such as the Japanese yen and the yellow metal look quite attractive.

The Virus rescission fears

US economy is currently facing un unprecedent shock, both to the supply and demand side. The fact that workers are isolated and taking care of their relatives and people are staying home and do not spend. Sentiment analysis of twitter posts indicates that consumer optimism is tanking as utility prices are rising while the demand for electricity is falling yet there is little evidence that unemployment is rising. The US weekly jobless claims continue to decline while the data do not yet point to a recession, though one is surly is coming.

In Europe, the coronavirus continues to spread rapidly across the globe, igniting fears of a deep recession as consumers are told to stay home and demand collapses.  the number of Coronavirus infections around the world increased to more than 219,000 cases, and expectations for spread continuation which already has struck 176 countries. Italy recorded 475 deaths due to the virus spread in a single day, its most horrible tally yet.

consequently, the biggest European economies such as Italy, France, Spain, and to a lesser extent Germany have gone into full lockdown to slow the outbreak, and it might be just a matter of time until America follows along. these measures will paralyze economic activity over the coming months, having a devastating impact on industries like tourism, airlines, and anything related to entertainment.

Dow Jones; Entering a Bear Market

On March 9 US bull market turned 11 years old and after two days later, it was history. Concerns about the covid-19 epidemic have caused a rout in the Dow Jones Industrial Average, pushing it down more than 20% from its high on February 12th—a fall that fits the definition of a bear market. The worst sell-off in history began with the Wall Street crash of 1929. Two big bear markets have occurred this century.

Currencies; Dollar Hits New 3-Year High, Cable collapsed, and the Aussie could be in trouble ahead of jobs data

The currency market exploded into life for all the wrong reasons overnight. Mass drops in equity, commodity and bond markets saw the US dollar explode higher as investors globally rushed into cash and short-dated bills. Only the Euro showed any sort of resistance, as fund managers repatriated Euros from across the globe, but it still fell to 1.0900.

As for the British pound, the BoE’s unlimited helicopter money and speculation of a population lockdown in London saw Sterling collapse to Brexit-vote lows.  The GBP/USD is trading around 1.15 in wild swings after collapsing on Wednesday to the lowest levels since 1985. The UK is closing schools and London braces for a lockdown amid the coronavirus crisis.

In Australia, the commodity linked currency country will publish employment data on Thursday but with markets gripped by panic over the coronavirus, the focal point for investors is whether the Reserve Bank of Australia will join the quantitative easing (QE) set by the other central banks globally. The central bank is expected to hold an emergency meeting on Thursday and is certain to cut rates. The AUD/USD pair came under strong selling pressure during the US session yesterday and still erased more than 200 pips during todays session to slump to its lowest level since November 2008 at 0.5730.

Overnight panic set the oil markets to tumble

The WTI did collapse by a gigantic 17.0% to $22.60, an 18-year low while Brent crude fared little better, tumbling by 8.0% to $26.50 a barrel. The outsized fall by WTI reflecting the news that onshore storage for excess oil supplies is running out around the world, and the general capitulation trade.

Moreover, this recent drops on the black metal could further escalate after Bank of America reported that about four million barrels per day of new supplies to OPEC + may appear in the next two months, adding that global consumption may shrink by more than 0.5 million barrels per day in the second half of 2020. The fact that the world is running out of onshore and floating storage has left oil falling again today. Brent falling 5.0% to $25.00 a barrel, and WTI falling 2.50% to $22.00 a barrel. With a global recession upon us, with an indeterminate end, and a price war in full cry by oil producers, the world should probably be preparing itself of sub $20.00 oil sooner rather than later.

Gold and yen look could be attractive in the current situation

It’s not just that both are traditional safe havens. Both assets also benefit from low interest rates, and lately central banks around the world are cutting rates rapidly. Gold for example, which pays no interest to hold, becomes more attractive when bonds yields are also near zero, or negative. Negative Treasury rates are currently here. The front end of the yield curve fell below zero for the first time. The benchmark 3-month yield is straddling zero, while 3-month LIBOR jumps. These are not surprising developments.

Similarly, the Bank of Japan already had the biggest stimulus program globally, so the more other central banks cut their own rates, the more attractive the yen becomes as rate differentials between Japan and the rest of the world narrow.

Gold hasn’t behaved like a safe haven lately, but that could change. The losses in bullion are owed mainly to a liquidate everything and go for the dollar approach. With leveraged funds absorbing heavy losses in stocks, many traders are likely forced to close profitable positions in gold to cover margin calls. However, in 2008 gold prices did drop 300$ yet after a 3-month gold started rising and did swing as high as 1900$ in 2011. Could this be the case again? In an environment characterized by fear and zero interest rates, gold will probably shine again before long.

How long will these pandemic effects last?

Unfortunately, nobody knows how long the world will stay shut. The assumption is that this will last around two to three weeks, but the risk is clearly a more continued shutdown.

Remember that Wuhan, the Chinese city where the virus first appeared, has been in lockdown for more than 7 weeks now despite dramatically lowering the number of new infections. Relaxing lockdowns too early could lead to renewed waves of infections, tough Measures to Stem the coronavirus outbreak could be in place for 18 months, according to many scientists.

Overall, the longer things stay shut, the bigger the economic pain and the less effective any stimulus measures will be in nullifying the damage. Governments can support small businesses for a few weeks, but can they do it for several months, especially in EU countries with already high debt

 

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