How the Coronavirus Impacted the Forex Market

The novel coronavirus (COVID-19 ) which emerged in December 2019 has now killed more than 2,100 people and infected more than 75,000 people. In this article we’ll explore how the epidemic has affected the global foreign exchange market so far.

To understand how the news influenced the market it’s important to review the major coronavirus headlines that emerged since the beginning of the year. 

January 11th: Wuhan health authorities reported the first known death from the disease caused by the virus. 
January 20th: The first confirmed cases of the coronavirus outside mainland China in Japan, South Korea and Thailand are reported.
January 23rd: Wuhan is cut off by Chinese authorities as all air, road and train links out of the city are suspended.
January 26th: China’s health commission minister warns that Coronavirus’s ability to spread is getting stronger.
January 30th: The World Health Organization (WHO) declares a global health emergency, as the outbreak continues to spread outside China.
February 7th: Li Wenliang, a Chinese doctor who tried to warn others about the deadly outbreak, dies from the coronavirus.
February 9th: The death toll in China surpasses the number killed worldwide by the 2002-3 SARS epidemic.

EUR/USD

EUR/USD has taken a beating in 2020 so far. The euro has been under pressure due to disappointing economic releases, most recently the German ZEW survey which showed a decrease in investor confidence. Meanwhile, the US dollar has been boosted by its safe haven appeal amid the coronavirus epidemic. The greenback has also been underpinned by positive US economic data, increasing the odds that the Federal Reserve will keep interest rates on hold. Ongoing negative news about the coronavirus and its impact on the global economy will likely weigh on the euro.

AUD/USD

China is Australia’s largest trading partner and news relating to the Chinese economy has a major impact on the Australian dollar. Since the Chinese renminbi is restricted to trading within a designated range, investors often use the Aussie dollar as a proxy for China. More broadly, the Australian dollar is viewed as a ‘risk currency’ that investors tend to avoid in periods of instability. Further negative news about the coronavirus will likely pressure the beleaguered Australian dollar, while signs of containing it will provide support.

USD/JPY

The Japanese yen is a leading financial safe haven, in part due to Japan’s status as the world’s largest creditor nation. Other safe haven assets include the Swiss franc, the US dollar and gold. We can see the yen strengthening against the dollar during the period when the most unsettling coronavirus headlines were being published. However, the dollar has since rebounded to make fresh highs, undermining the yen’s safe haven status. Investors have preferred gold over the yen as a safe haven due to Japan’s proximity to and dependence on China. Gold prices rallied this week to their highest levels since 2013. Elsewhere, Bitcoin rebounded sharply while the coronavirus spread and the case is building for it to be viewed as a legitimate safe haven asset alongside gold.

USD/CAD

The risk sensitive Canadian dollar weakened as fears mounted over the coronavirus and crude oil prices fell. However, oil prices rose last week as a slowdown in new coronavirus cases began to ease fears over its global economic impact and the Canadian dollar in turn received a boost from the uptick. The Loonie has a positive correlation with crude oil because Canada is one of the largest oil producing countries in the world.

The Bottom Line

A Reuters poll of economists predicted that China’s annual economic growth in the first quarter of 2020 will slow to 4.5% from 6.0% in the previous quarter, illustrating the drastic toll of the coronavirus. The knock-on effect globally was starkly visible earlier this week as Apple’s (AAPL) stock price fell sharply after cutting its quarterly revenue forecast due to the outbreak. Recent reports that the number of confirmed new cases in China appear to be slowing have inspired some optimism in the markets. However, experts have also warned that the crisis may have not yet reached its peak.

EUR/CAD Slips to Lowest Levels in Almost 3 Years

EUR/CAD fell to its lowest levels since April of 2017 on Monday, a day lacking in major economic news. The euro has been pressured by lackluster economic data, while Canadian dollar has been supported by rising oil prices.

The euro remained on the back foot against its major rivals on Monday amid enduring concerns over weak economic growth. Figures released last Wednesday showed that euro-area industrial production fell by 2.1%, the most in almost 4 years. German GDP also came in weaker than expected on Friday and reflected that the German economy stagnated at the end of 2019. The market now looks to the release of Tuesday’s German ZEW Economic Sentiment indicator for further clues to the health of the eurozone economy.

Oil prices rose last week as a slowdown in new coronavirus cases began to ease fears over its global economic impact. As of Monday, there were more than 71,000 cases of the disease globally and over 1,700 people have lost their lives, the majority in China’s Hubei province. Rising oil prices will likely continue to lift the Canadian dollar. The Canadian dollar has a positive correlation with crude oil, because Canada is one of the largest oil producing countries in the world. 

A slew of key Canadian economic data is due to be released this week, with manufacturing sales on Tuesday, CPI on Wednesday and retail sales on Friday. In January the Bank of Canada (BOC) held  its key overnight interest rate at 1.75%, but left the door open to a possible cut in the event of slowing economic growth.

Looking at the EUR/CAD daily chart we can see that price found resistance at the 200-period simple moving average. Monday now marks a potential 10th consecutive day of losses as the pair sinks to multi-year lows. Potential support lies at the prior low of 1.4043, while possible resistance sits overhead at 1.4454.

EUR/USD Falls to Fresh Multi-Year Lows Amid Weak Eurozone Data, Coronavirus Fears

The euro fell to its lowest levels against the dollar since April of 2017 in early trading on Friday. The European single currency has been pressured by lackluster eurozone economic data while the US dollar has been lifted by its safe haven appeal as fears over the coronavirus persist.

On Friday, authorities in China reported 5,090 new coronavirus cases and 121 new deaths in the previous 24 hours. The latest official data indicates that in China over 63,000 people have been infected and at least 1,380 people have died. Meanwhile, a senior administration official told CNBC that the US does “not have high confidence in the information coming out of China” on the figures relating to coronavirus cases. Both the US dollar and Japanese yen were boosted by their safe haven status.

At the same time, weakness in eurozone data weighed on the euro this week. Figures released on Wednesday showed that euro-area industrial production fell by 2.1%, the most in almost 4 years. In addition, German GDP came in weaker than expected on Friday and reflected that the German economy stagnated at the end of 2019.

The disappointing eurozone figures contrast with recent positive US data. The US employment report last week showed that 225K new jobs were created and that the unemployment rate ticked up slightly to 3.6%. The New York Federal Reserve announced on Thursday that it will cut back the repo support it is providing in the overnight lending markets. Investors now turn their attention to today’s US retail sales report.

Looking at the EUR/USD monthly chart we can see that price has been in a steady downtrend since 2008 and that a major long term downward channel has formed. Bears begin to eye the prior low of 104.58, representing a potential major level of support.

Gold Supported After Warning from WHO Chief

Gold traded higher for a fourth day early on Monday after a tweet from the Director-General of the World Health Organization stoked fears over the coronavirus and its impact on the global economy.

Dr. Tedros Adhanom Ghebreyesus warned on Sunday; ‘The detection of a small number of cases may indicate more widespread transmission in other countries; in short we may only be seeing the tip of the iceberg.’ 

He added:‘In an evolving public health emergency, all countries must step up efforts to prepare for #2019nCoV’s possible arrival and do their utmost to contain it should it arrive. This means lab capacity for rapid diagnosis, contact tracing and other tools in the public health arsenal.’

The death toll from the epidemic has now reached over 900 people in China. Chinese health authorities said on Monday that they received reports of 3,062 new coronavirus cases and 97 deaths on Sunday. Recent cases were also reported in Japan, South Korea, Vietnam, Malaysia, the United Kingdom and Spain. Fatalities from the coronavirus in China have now exceeded those of the SARS epidemic, 17 years ago.

Gold is getting closer to the high of $1,611 it reached on January 8th, which was its highest level since 2013. Meanwhile, Bitcoin traded over the major psychological level of $10,000 for the first time since September of 2019 on Sunday and the safe haven Japanese Yen traded higher on Monday.

Investors now look to the Congressional testimony of Federal Reserve Chairman Jerome Powell, set to take place on Tuesday and Wednesday. A Federal Reserve report on Friday said that the coronavirus is a new risk to the U.S. outlook: “The recent emergence of the coronavirus could lead to disruptions in China that spill over to the rest of the global economy.”

Looking at the gold daily chart we can see that price is nearing the recent high of 1,593 while potential trendline support lies to the downside. With price trading above both the 50 and 200 period moving averages, gold bulls are on the front foot.

Aussie Powers Higher Amid Rising Risk Appetite

The Australian dollar continued to rally sharply against its peers in Wednesday trading. The two main forces behind the rebound have been the Reserve Bank of Australia (RBA) decision to leave rates on hold and waning fears over the Wuhan coronavirus.

At its first meeting of the year on Tuesday, the RBA kept interest rates unchanged at the record low of 0.75%. Despite the devastating Australian bushfires and the Wuhan coronavirus threat, the RBA kept its forecast for economic growth in 2020 at 2.75%.

In his statement, Governor Philip Lowe left the door open to rate cuts in 2020: “The Board will continue to monitor developments carefully, including in the labor market. It remains prepared to ease monetary policy further if needed to support sustainable growth in the economy.”

Meanwhile, risk-sensitive currencies such as the Australian dollar and the New Zealand dollar were lifted by news of medical progress in combating the coronavirus. Researchers at Zhejiang University reportedly found drugs to treat people afflicted with the virus. In addition, according to a report from Sky News, researchers at Imperial College London plan to begin testing a vaccine on animals as early as next week.

On Wednesday, China’s Health Commission indicated that 65 people died on Tuesday and that 3,887 more people were infected by the coronavirus. The World Health Organization (WHO) cast doubts over news of a drug breakthrough in a statement on Wednesday. WHO spokesman Tarik Jasarevic warned: “There are no known effective therapeutics against this 2019-nCoV (virus) and the WHO recommends enrolment into a randomized controlled trial to test efficacy and safety.”

Traders now turn their attention to Australia retail sales and trade balance data due for release on Thursday. In January, the Australian Bureau of Statistics reported that retail sales increased by 0.9% in November, beating expectations and marking the largest rise since November of 2017. However, analysts expect retail sales to have slipped by -0.2% in December.

GBP/AUD Rallies to Multi-Year Highs on BoE Boost, Virus Fears

GBP/AUD rallied to its highest levels since June of 2016 in early trading on Friday. Sterling was lifted on Thursday, after the Bank of England (BoE) announced its decision to keep the official bank rate on hold at 0.75%. Meanwhile, the risk-sensitive Aussie has been under pressure amid rising fears over the Wuhan coronavirus.

At Mark Carney’s final meeting, the Monetary Policy Committee (MPC) were more hawkish than expected, voting 7-2 in favor of keeping interest rates steady. The UK central bank justified its decision citing a recent uptick in business activity, a reduction in Brexit uncertainties and indicators that global growth has stabilised.

However, the BoE also cut its U.K. economic growth forecasts through 2022 and made it clear that a rate cut is possible in 2020. The CME BoEWatch tool currently shows a 22% chance for a quarter point rate cut at the March meeting. 

Sterling extended its gains on Friday, moving towards a positive end to the week. The United Kingdom now turns it’s attention to its official departure from the European Union, scheduled to take place at at 11PM London time, midnight in Brussels.

The China-linked Australian dollar fell to fresh lows as alarming news relating to the coronavirus dominated headlines. On Thursday, the World Health Organization (WHO) declared the virus a global health emergency and Chinese authorities reported over 40 deaths in Hubei province. On Friday, authorities confirmed over 9,700 coronavirus cases in China. The figure exceeds that of those infected globally by the 2003 severe acute respiratory syndrome (SARS) virus. On Thursday, Israel banned the entry of all flights from China and the United States warned Americans not to travel to China.

Looking at the GBP/AUD daily chart we can see a well defined trendline representing potential support to the downside. The 61.8% Fibonacci retracement level at 1.9845 stands out as potential resistance above.

BoE Keeps Powder Dry in Carney’s Final Meeting

The British Pound rallied on Thursday after the Bank of England (BoE) announced its decision to keep the official bank rate on hold at 0.75%. Market opinion was split leading up to the meeting, with substantial expectations of a rate cut which would have been the first since 2016.

The Monetary Policy Committee (MPC) were more hawkish than expected, voting 7-2 in favor of keeping interest rates on hold. Policymakers Michael Saunders and Jonathan Haskel voted to cut rates.

The UK central bank cited a pickup in business activity since the December election, a reduction in Brexit uncertainties and indicators suggesting that global growth has stabilised as factors behind the decision to hold rates. However, it also cut its U.K. economic growth forecasts through 2022 and left the door open to a potential rate cut in 2020.

The BoE Monetary Policy Report stated: “Monetary policy will be set to ensure a sustainable return of inflation to the 2% target. Policy may need to reinforce the expected recovery in U.K. GDP growth should the more positive signals from recent indicators of global and domestic activity not be sustained or should indicators of domestic prices remain relatively weak.”

The CME BoEWatch tool currently shows a 68% chance of a quarter point rate cut to 0.5% at the March meeting.  Outgoing BoE Governor Mark Carney will be succeeded in March by Financial Conduct Authority (FCA) chief Andrew Bailey.

At 11PM London time (midnight in Brussels) tomorrow the United Kingdom will officially leave the European Union. The transition period then begins during which the UK will remain part of the single market and customs union until the end of 2020. 

Looking at the GBP/USD daily chart we can see that price is holding above the 200-period simple moving average and trendline support. Potential resistance lies overhead at the recent high of 1.3172.

Bitcoin Bulls Eye 10k Amid Global Risk-Off Sentiment

Bitcoin rallied sharply this week, reaching its highest price levels since early November. The move took place as fears mount over the economic fallout from the coronavirus outbreak in China.

Chatter over Bitcoin’s status as an emerging safe haven has increased this year. The price of the world’s largest cryptocurrency by market cap rallied along with gold and the Japanese yen as news of the Wuhan coronavirus dominated headlines. In early January, Bitcoin jumped after news broke that Iranian Major-General Qassem Soleimani was killed in a U.S. air strike. Gold also soared as Middle East tensions boiled in the aftermath of the assassination. Additionally, the price of Bitcoin rose as stocks sold off on flaring concerns over the US/China trade war in August of 2019.

Bitcoin enthusiasts now look forward to the third ‘halving’ event expected to take place in May of 2020. Only 21 million Bitcoins can be mined, the last of which will be mined in 2140. The rate at which they are created is cut in half every four years. Historically, the halving events have been followed by major rallies in price. A debate rages over whether the halving expected in May will trigger another bull run, or if the event is already priced in. Bitcoin reached a record high of almost $20,000 in December of 2017.

Looking at the daily chart, we can see price is now trading above the 200-period moving average, suggesting that the bulls have the upper hand for this timeframe. Potential trendline support lies below and the market eyes the mega-psychological level of 10k overhead.

Investors now look to the conclusion of the all important FOMC meeting later today. The CME Fedwatch Tool currently shows an 87% probability that the federal funds target range will be kept steady at 1.50-1.75%.

Sterling on the Back Foot Ahead of BoE Super Thursday

GBP/USD fell for a fourth consecutive day in early trading on Tuesday, nearing a major level of trendline support. Investors await Thursday’s key Bank of England (BoE) meeting, taking place a day before Britain finally leaves the European Union.

The CME BoEWatch Tool currently shows a 56% chance that the target rate will be cut to 0.50% at the final policy meeting chaired by Mark Carney. Lower interest rates naturally make a currency less appealing to investors, tending to pressure prices lower.

On Friday, data from Markit Economics showed that the UK composite PMI reached 52.4 in January, up from 49.3 in December. The rising demand for manufacturing and services dampened the odds for a rate cut this week.

However, GDP and inflation data have increased the odds for a rate cut. Earlier in January the UK Office for National Statistics reported that GDP fell by 0.3% in November, missing market expectations. In addition, the UK inflation rate fell to 1.3% in December, its lowest for more than three years and substantially below the BoE’s official 2.0% target.

Friday January 31st marks Brexit day and at 11PM London time (midnight in Brussels) the United Kingdom will no longer be a member of the European Union. At that time the transition period begins during which the UK will remain part of the single market and customs union until the December deadline.

Tensions rose on Monday after Michel Barnier stated that the EU will never compromise on the integrity of its single market and that there will be negative consequences to Brexit. Speaking at the Queen’s University Belfast, the EU’s chief Brexit negotiator said: “There will be no compromise on the single market. Never, never, never.” He added: “It is absolutely clear that there will be negative consequences” and went on to say; “whatever agreement we reach on our future relationship, Brexit will always be a matter of damage limitation.”