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How Will the FX Market React to Returning Coronavirus Lockdowns

In the Northern Hemisphere winter is setting in, the regular flu season is beginning to break out, and there is a looming threat of a Coronavirus resurgence. Unfortunately, the Northern Hemisphere is where the majority of the world’s population reside and subsequently, where the largest economies are situated. Meanwhile, the number of Coronavirus cases are rising after a summer of relaxed restrictions in most countries. Therefore, governments are imposing more restrictions on what we can do and where we can go with the warning of yet more shelter in place orders.

While many of us spent months at home, the economy literally stopped for months and arguably never restarted fully. During the spring lockdowns of 2020, there have been unprecedented events in the markets, across all asset classes, including Forex. 

As the prospects of another wave of lockdowns across most developed economies seems more likely day by day, let’s try to understand how these events could affect the Forex market this time around. Usually, the best way to predict the future is to look into the past. To help speculate what may happen to the FX and global markets in the coming weeks and months, let’s reflect on what happened last time around.

A timeline of Coronavirus lockdowns

In February 2020, cases of Coronavirus started springing up in Europe. On the 9th of March, the situation in Italy had already spiralled out of control, and the Italian government had imposed a national lockdown. Northern Italy became the European epicentre and sent alarm bells ringing across the continent. A week later, on the 16th of March, more European cities announced states of emergency and imposed lockdowns. By the end of the month, New York became another epicentre, and one of the most influential cities in the world began working from home. Both the CME Group and the New York Stock Exchange closed their trading floors and major banks required most of their employees to work at home.

How did the global markets react in the last lockdown?

As most of us went into the first lockdowns in March, at the time, it felt like a once in a lifetime experience. No one knew what to expect, and many are probably still astonished by what has happened. One positive aspect about the rising possibility of more lockdowns this winter is at least this time we have some experience to draw from.

Some of the highlights in the global markets triggered by the Coronavirus pandemic include gold reaching an all-time high, negative crude oil price and stock market indices free-falling, with circuit breakers halting trading multiple times per session. The price of commodities and assets have a considerable influence on the currency markets, as ultimately currency is the medium of exchange used for making purchases.

How lockdowns affected the EUR/USD

Throughout February, the dollar steadily strengthened almost 320 Pips against the Euro; the EUR/USD price fell from 1.1095 to 1.0777. Toward the end of February, the dollar made a dramatic u-turn and shot up 710 Pips to just under 1.15. Similarly, the dollar made another reverse and tightened the gap with the Euro to 1.06361. Since this low of March, the dollar has continued to weaken against the Euro, hitting the 1.2000 price level, but not being able to break through it. Take a look at the EUR/USD chart over lockdown.

Daily Chart of EUR/USD 2020
Daily Chart of EUR/USD for 2020 Year to Date

There is never a single reason that causes a currency pair as liquid as the EUR/USD to behave so erratically. Some of the top reasons for the volatility are;

  • Europe and the USA were playing a tug of war between who shall be titled The West’s COVID-19 epicentre. 
  • The prospects of a recession in Europe were inevitable, considering how hard hit most member states were, Italy, Spain, Germany, et. al.
  • There was a huge stock market sell-off which flooded the market with dollars.
  • Institutions with obligations in USD weren’t getting their dollars through trade, so needed to purchase them, taking liquidity out of the market.

How lockdowns affected the AUD/USD

The Australian dollar felt a Lot of volatility this year. The AUD/USD trading pair started the year at 0.70200, and by the 19th of March, the price had fallen a dramatic 21.5% to 0.55086, a historic low. The Australian dollar went on to recover what it lost against the US dollar, and as of the 30th of September 2020, the AUD/USD price is 0.71583.

Daily Chart of AUD/USD for 2020 Year to Date
Daily Chart of AUD/USD for 2020 Year to Date

A few reasons that contributed to the volatility of the AUD/USD;

  • Australia’s economy is closely tied to China. One of the biggest exports is minerals which China requires for its massive manufacturing business and infrastructure projects. As China is battling the COVID-19 outbreak, trade with China takes a back seat.
  • Another of Australia’s biggest exports is beef. Tensions between Australia and China grew because of two issues; transparency into the way COVID-19 was handled by the Chinese Communist Party and human rights concerns in Hong Kong, but more specifically China’s influence in Australian universities. China threatened boycotts on Australian products.

How lockdowns affected the USD/CAD

In March 2020, the Canadian dollar reached it’s the weakest point against the US dollar, hitting a four year low for the Loonie. The Canadian dollar has a great in common with the Australian dollar, in the sense that both economies and therefore the currencies do well when US and Chinese economies do well as both countries provide fuel and materials to feed economic development. Looking at the chart below, you’ll see very similar behaviour to the AUD/USD currency pair.

Daily Chart of USD/CAD for 2020 Year to Date
  • As a significant producer of oil, Canada suffered from a dramatic fall in the price and demand for oil.
  • Unlike the US dollar, the Canadian dollar isn’t considered a safe haven currency and is mainly used for conducting trade and commerce, which has been crippled by the Coronavirus situation.

What will happen in the next round of lockdowns?

Now the chance of Coronavirus lockdowns is hitting headlines, many traders and investors are wondering, how is this time going to be different, worse, or will it even happen? We’ve already seen some interesting things happen in the markets this year because of COVID-19. As we approach the end of this rollercoaster of a year, don’t forget that any lockdowns will be met with US election and Brexit uncertainty, plus the economic devastation caused already. This article will, unfortunately, finish with a weak conclusion and some cheesy advice; buckle your seatbelt.