It has been a very dramatic week in currency markets with the spread of the coronavirus worldwide very much the theme for forex traders going into Monday’s open. The US dollar looks to have registered its worst week since 2016 as yields in US Treasuries plunged. This followed an emergency rate cut from the Federal Reserve of 50bps.
Central banks start to react to coronavirus – record bond rally?
Central banks around the world are poised to slash rates in an effort to cushion the impact of the coronavirus on currency markets. The Fed’s decision has had a huge impact on what was seen as a popular carry trade, namely borrowing in EUR and JPY to acquire US bonds.
We are currently seeing what looks like a record breaking global bond rally – many larger investors are dumping stocks and buying government debt, in a migration the size of which we have not seen since 2008.
As the week closed the EUR was trading well up against the USD at an eight month high, while volatility was picking up in all the major currency markets. As ever, there are always going to be winners and losers in the forex markets, hence the appeal of FX trading at a time when many other asset classes are taking a pounding. The EUR put on some serious numbers Friday against both USD and GBP and was up 1% against sterling for the week.
Analysts are concerned about the relatively rapid spread of the coronavirus around the planet since it has managed to escape China and what that will mean for the international economy. There is now open talk of recession, and this is what has central bankers so worried. The drive into the EUR, and why it was performing to well on Friday, is being fuelled by the acquisition of EUR assets as investors sell out of other markets – like US Treasuries – and retreat to perceived quality in the Eurozone.
“Disruptions and delays to international supply chains are impacting global trade and production,” explained Olivier Desbarres, Director with 4X Global Research. “Moreover there is growing evidence that this supply-side shock is feeding through to the demand side, heaping pressure on the service sector and reatilers and forcing governments and corporates to postpone long-term investment plans.”
Desbarres thinks that the recent central bank cuts and no doubt more cuts and fiscal stimulation measures implemented in the coming weeks will have what he calls “a marginally positive impact on global economic growth” but could help to stave off a recession.
Chinese yuan market stages last minute rally
One interesting trend on Friday was the intraday volatility we saw in the Chinese yuan market – a surge in volumes among offshore CFD brokers reflected what was the market in buying mood on Friday morning, taking the CNY close to 6.96 which then reversed as Western markets opened and the USD dropped against other major currencies. Part of this is being driven by what looks like a slowdown in the spread of the virus in China itself and the fact that most Chinese factories are returning to full capacity.
Forex traders are in need of some positive news right now, and while we hesitate to draw a correlation between rising temperatures in mainland China (Wuhan at 14 degrees Celsius Friday) and the drop in the number of new cases, we could see the seeds of hope germinating in Asia currencies next week.