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Coronavirus and Its Effect on Forex

What is Coronavirus – Why Would It Impact the Forex Market 

Coronavirus is a zoonotic type of virus, transmitted from animals to humans. It is transmitted amongst humans through coughing sneezing, or even shaking hands. The virus can live for several hours on many types of surfaces, including clothes.

 

The best way to prevent and slow down transmission is be well informed about the COVID-19 virus, the symptoms plus diseases it causes and how it spreads. Protect yourself and others from infection by washing your hands or using an alcohol-based rub frequently and not touching your face.

 

Most people infected with the COVID-19 virus will experience mild to moderate respiratory illness and recover without requiring special treatment. Older people, and those with underlying medical problems like cardiovascular disease, diabetes, chronic respiratory disease, and cancer are more likely to develop serious illness.

 

At this time, there are no specific vaccines or treatments for COVID-19. However, there are many ongoing clinical trials evaluating potential treatments. WHO (World Health Organization) will continue to provide updated information as soon as clinical findings become available.

 

Since the outbreak in December 2019, it has now killed over 16,500 people and infected at least 379,000 people, according to a tally by John Hopkins University.

 

To this point, the outbreak of the Novel Coronavirus or NCOV-19 has greatly affected numerous events, economy, and even our daily lives. Even this year’s Olympics are in doubt and only war has ever forced them to be scrapped.

 

Furthermore, China has cordoned off the whole province of Hubei, where the virus started. Companies like Apple, Tesla, Samsung and Microsoft all have factories in China, which have been shut down. These events may cause a deceleration in GDP, or even recession, as travel and the capability to work is hindered.

 

A decelerating economy would weaken that country’s currency, however, a global crisis with the most major economies effected may see the effect on the Forex market muted. The Coronavirus impact on the forex market could affect certain currencies greatly and others may see very little increase in volatility. Trading strategies may need to be re-thought to take into account the negative affect on the economy of a currency. Infection count of the Coronavirus may affect how you trade forex. A currency whose country keeps getting headline news with increasingly higher infection counts may see an increase in volatility.

 

Hence, it is unlikely to be in favour of those who just decided to learn to trade Forex. Therefore, it is important for traders to remain calm, take a step back and do some research and have a better idea of what exactly is happening. Or traders can keep up-to-date and determine their trading strategies by checking the Trading Strategies reports prepared by Strategic Alpha, available on Doo Prime’s website.

 

Logical Consequences of Coronavirus Impact on Forex Markets  

 

To determine the consequences on Forex markets of global pandemics, such as the case of Coronavirus, we can look at the impact on stock markets. Stock markets are an excellent gauge of economic activity. Forex markets, in the long run, follow the developments in each countries’ economy.

 

To venture how much the Forex Market will be affected, we can compare the effects of the previous pandemics on the stock market.

 

The US economy is the world’s largest market if that market is affected there will necessarily be repercussions throughout the globe. However, during the previous pandemics, there was a little negative impact on global economies. Statistically speaking, it probably looks like there is a positive correlation between pandemics and positive performance of the stock market. The coronavirus impact on Forex markets may be different. This time, governments in certain countries are beginning to take action to try and stop the spread of the epidemic. In some countries social distancing are imposed to individuals or even the whole town. Stock markets are certainly reacting differently this time around as most major stock markets have taken a hit since news of Coronavirus hit the headlines.

 

How Much Has Coronavirus Impacted Forex Market  

 

To look at the coronavirus impact on Forex markets, we can refer to the impact on the stock markets since the outbreak of the virus in various western countries. Taking February 3rd as the starting point to look at the stock market performance. On that day CNN reported that there had been 426 deaths and more than 20,000 contagions world-wide.

 

The table below shows the effect of Coronavirus headline news once it hit the market.

 

Week S&P Weekly % change MSCI Weekly % change
17 February 2020 -1.35 -1.18
24 February 2020 -11.62 -10.89
2 March 2020 -0.84 0.38

 

 

Looking at a daily chart of the UK stock market we see a similar pattern. The FTSE 100 (Financial Times Stock Exchange) was in a sideways trend, with a certain bullish tendency over the previous months, back to August 2019. The lateral price movement was mainly due to the uncertainty created with Brexit. However, the stock market was holding its ground. That is until 24th February when the FTSE tanked. Shares are possibly perceived as the riskiest asset by investors. So, they usually hit very hard. The FTSE 100 has dropped 20.8% from its high on 24th February. You could say a market rout in all effect, and as the pandemic spreads we probably haven’t seen the full extent of the Coronavirus impact on the Forex market.

 

The Coronavirus impact on the Forex markets is inevitable given the strain being taken on all major stock markets. Stock markets are in turmoil because of the possibility this pandemic will restrict economic activity in a great way. This is plausible, as we are seeing restriction of movement to and from large geographical areas alongside major mass events shut down. And we are not talking only about China.

 

Emotional Decision Making a Consequence of Coronavirus Impact on Forex Market 

 

Fear is always a big driving factor in market price action. It also dictates more general social behaviour too. In Italy, whole supermarkets saw their shelves emptied in a single day. This was before any lockdowns were even mentioned but at the beginning of the spread of Coronavirus. Even now, with hindsight that behaviour seems extremely unnecessary, as supplies are open and regular.

 

So, it’s reasonable to think that fear also drives masses in the Forex market to take the same action in their trading strategies. This fear has shown a certain pattern. Investors don’t like risk, in general, or rather they want to hold assets that don’t have too much of a bumpy ride. Also, add that in times of danger or threats investors will typically favour less risky assets. We have already seen UK short term gilts drive into negative yields. This happens as investors dump risky assets such as stocks to buy low-risk government bonds.

 

We don’t actually have a financial crisis, however, the fear that this may occur is driving the market right now. Investors are acting in accordance with the fact that a financial and economical crisis is just around the corner. So, as market players get emotional and everyone heads for the exit door certain markets will get hit harder than others. Trading strategies tend to align in times of crisis and that includes Forex markets. Everyone knows where the perceived danger is, and they also know where the perceived safety is.

 

But which currencies show the Coronavirus impact on Forex markets? Let’s have a look at the Japanese Yen. We have seen a rush on this currency over the past days. The Japanese Yen is considered a haven currency when compared to the US dollar. This might seem surprising but whenever there has been a global crisis the Japanese Yen has usually appreciated. If the US dollar is considered risky and the Yen is considered simply less risky, then USD/JPY will simply go south to reflect investor and market preference.

 

According to statistics, the Coronavirus impact on the Forex market shows how the Japanese Yen has appreciated over the past 12 trading days. From a high of 112.22 on the 20th February, then an almost vertical slide to a low of 101.18 on 9th March. This has happened as Coronavirus contagion and death toll counts have risen globally. That is a 9.8% drop in the value of the dollar in just 12 days. There, of course, is the double effect of the FED interest rate cut on 3rd March, but there is a good amount of fear that pushed the Japanese Yen so high in such a short amount of time.

 

Looking at the previous months leading up to the dollar rout, we see a steady upward trend for USD/JPY. The Japanese economy hasn’t been developing very well at all for various years now. The most recent data showed GDP shrunk by 7% for the quarter. While the US economy has been racing forward, it seemed a logical rally for this pair. Until the Coronavirus showed up and investors scattered for safety, forgetting all the fundamentals.

 

However, the Coronavirus impact on the Forex market will not always be negative for the US dollar. As we mentioned before. Investors prefer a less risky asset to a riskier one. So, with each currency pair, a comparison should be made. If we look at the Coronavirus impact on the Forex in emerging markets, we will see that the dollar benefits from the current Coronavirus pandemic.

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