COVID-19 and Its Impact on The Balance of the Forex Markets
The coronavirus has ravaged the global economy. Few geopolitical events have impacted the financial markets with quite as much venom and ferocity as COVID-19. The virus is now running amok in 104 countries and territories around the world, and a highly infectious strain is rampant on the Diamond Princess cruise ship which is currently harbored in in the Japanese port at Yokohama. The total number of deaths continues to tick up at several hundred people per day, with the total number of infections now numbering some 109,695 people (Sunday March 8, 2020). It is difficult to ascertain the arithmetic or geometric rate of growth of the virus, given the poor or inaccurate reporting frameworks that are currently in place in China, and other emerging market economies.
As it stands, the top six countries hardest hit with COVID-19 also happen to be some of the biggest economies in the world, including China (80,703+) Italy (7,375 +), South Korea (7,313+), Iran (6566 +), France (1,126 +), Germany (1,040+). This fluid situation is certainly worrisome given the virulence of the pathogen. China remains ground zero for the virus, with an incredible 73.57% of infections. It is also the biggest economy of all the countries that bear the burden of coronavirus, meaning that Chinese productivity has taken a huge hit. As the economists say, when China sneezes the whole world catches cold - this is certainly proving to be true in the wake of this devastating pandemic.
How Are the Chinese Financial Markets Performing?
One of the premier Chinese stock markets - the Shenzhen Stock Exchange - is actually performing surprisingly well in the wake of the virus. It is up 11.16% for the year-to-date, opening at 1,722.95 on January 1, 2020, and currently trading around 1,915.17. A dip took place between January 23 and February 3, 2020, but a robust recovery has followed. The Shanghai Stock Exchange has performed worse in 2020. After taking a hit on January 22, 2020, the inexorable climb began on February 3, 2020. For the year-to-date The Shanghai Composite Index is down just 0.51%, in line with major other bourses all over the world. Consider the following stock markets, and their year-to-date performances:
- Dow Jones Industrial Average - down 9.37% YTD
- NASDAQ Composite Index - down 4.42% YTD
- S&P 500 Index - down 8% YTD
- FTSE 100 Index - down 14.32% YTD
- Nikkei 225 Index - down 14.04% YTD
These figures are particularly alarming, given the huge impact that these selloffs are having on the values of individual investor portfolios and retirement accounts, as well as the massive slowdown in global economic activity. From a rudimentary perspective, it is crystal clear that whenever trade activity vis-a-vis trade volume decreases, so too does the demand for currency. With so many companies temporarily shuttering operations, laying people off, and downsizing, it makes sense to say that Forex trading activity has been rather lacklustre. There is simply not enough liquidity in the financial markets to warrant huge volumes of trading.
People are scared and when fear drives financial markets safe haven alternative investments are sought such as gold bullion, Treasury notes, fixed-interest-bearing securities, 'safer ETFs and stocks', and the like. Forex is typically regarded as a risky proposition by most novice traders, although there are hedge currencies in and among the mix (JPY, USD, EUR, GBP). Traders at trading platforms like Plus500 are shorting EMEA economy currencies over the short-term and going long on the greenback, euro, and pound.
On 21 February 2020, some 75,000 people were affected and 2,100 people were dead. Barely 3 weeks later that number is up to 109,695+ people with thousands more people dead. The performance of major currency pairs like the EUR/USD, AUD/USD, and GBP/USD have all been affected in the following ways:
- EUR/USD - the euro/dollar is down 0.20% for the year-to-date
- AUD/USD - the Australian dollar/US dollar is down 5.67% for the year-to-date
- GBP/USD - the British pound/US dollar is down 1.47% for the year-to-date
- USD/ZAR - the US dollar/South African rand is up 12.87% for the year-to-date
- USD/RUB - the US dollar/Russian ruble is up 10.66% for the year-to-date
- USD/KRW - the US dollar/Korean Won is up 3.16% for the year-to-date
- USD/BRL - the US dollar/Brazilian real is up 14.96% for the year-to-date
An interesting trend emerges from the data, notably that the performance of major currency pairs from developed economies have not taken as big a hit as the performance of emerging market currencies such as the South African Rand, Brazilian real, and Russian ruble. Clearly, the strength remains that the US dollar, the British pound, and the euro and the forex weaknesses we are seeing are with all the BRICS (Brazil, Russia, India, China, South Africa) style countries.
How much further markets will fall is anyone's guess, but nobody is willing to speculate just yet. There is a growing sense of concern that markets will get worse before they get better and that may just benefit short-sellers in the FX arena.