How is Covid-19 impacting the FX market?
Creating not only a global health emergency but a financial crisis, Covid-19 has already had a worrying impact on the economy with both industrial production and retail sales experiencing historic drops. Small businesses are closing, governments are bailing out people who can’t work and the FTSA, Dow Jones Industrial Average and the Nikkei have all seen huge falls. But what about Forex? How has the Corona upheaval impacted the FX market and what does this mean for traders?
Dollar strengthens due to Coronavirus worries
In the foreign exchange market, the U.S. dollar rules. It’s top dog, with around 90% of Forex trades involving this currency. It’s the world’s reserve currency and, therefore, the axis upon which the global financial system turns. Therefore, an analysis of the U.S. dollar in light of the Covid-19 pandemic is a good place to start. So, what’s the latest?
- The $6.6 trillion-a-day FX exchange market has experienced dramatic swings in recent days as panicked investors react to the global Coronavirus pandemic by dumping everything in exchange for the greenback. Worries about the economic fallout from Covid-19 have boosted dollar demand causing the U.S. Dollar Index to reach three-year highs – while other currencies simultaneously crash.
Dollar surge causes other currencies to crash
- The dollar’s rally reduced several currencies to multi-year lows. The euro/dollar, for instance, has traded below 1.0800 to 35-month lows while dollar/yen has pushed above 111.00. Euro’s decline came in spite of the $750 billion asset purchase programme launched by the European Central Bank (ECB) in response to the virus pandemic.
Marc Chandler, Chief Market Strategist at Bannockburn Global Forex said: “While the ECB’s announcement has helped the bond market, it has done little for the euro.”
- An increase in dollar demand is affecting nations across the globe with the excessive dollar surge meaning this currency is now hard to come by in Nigeria. As of mid-March, naira to dollar exchange rates – which have stayed quite stable at around 360 naira to the dollar since mid-2017 – have reached 430 naira. A dollar crunch can have a wide impact on businesses as well as the middle class who can afford foreign education.
- A number of steps have been taken to address the dollar squeeze. These include lowering the rate on existing dollar swap lines with major central banks and establishing new swap lines with the central banks of other countries. The U.S. dollar has since softened.
Australian Dollar Depressed
The Australian Dollar (AUD) is a proxy for global risk assessment and is currently having a tough time due to Coronavirus concerns. Indeed, with the AUD/USD trading near 0.61, it’s down nearly 1,000 pips from highs near 0.70 observed in February. Investors are increasingly selling risky assets in light of the pandemic and fear of a global recession.
Pound falls against USD in biggest slump since 1985
With investors spooked by the Coronavirus, the Great British Pound (GBP) has fallen to the lowest level against the U.S. dollar since 1985, falling 5% in one day as of 18 March. The pound’s weakness stems partly from worries about how the government will pay for the economic emergency measures it has introduced. These measures include a £350 billion stimulus package for UK firms including £330 billion of business loan guarantees. GBP rallied slightly when the Bank of England cut interest rates to 0.1%.
Safe haven investments take a hit
Gold is traditionally seen as a safe haven in times of uncertainty. While gold prices initially rallied to their highest levels since 2013 in February, prices are now plummeting as investors become increasingly fearful about a global recession.
With Covid-19 sweeping across the globe, it’s essential to keep up with the latest news and to adjust your trading strategy appropriately.