Assessing the impact of coronavirus on three major Western currencies – Op Ed

By Martin Greene, financial markets expert based in the United Kingdom

Financial markets never respond well to uncertainty, so the outbreak of coronavirus has inevitably had a negative impact on the performance of several currencies. The possible longevity of the virus remains unclear, but its heart-breaking consequences in China have prompted a reassessment of major trading links.

China’s GDP has suffered, something that has far-reaching effects given China’s position as one of the world’s leading economic powers, while imports and exports across the globe have been stunted by changing demands. Many of the world’s major currencies have weakened, both as a response to what has already happened, and out of fear about what is to come.

Once the coronavirus outbreak is resolved, it will still take time for China to recover from weeks of severely restricted economic power. Market predictions made for 2020 will have to be torn apart and rewritten, with this unforeseen development affecting some of the most widely-traded currencies in the world.

Here is a brief overview of how the coronavirus scare has affected the US dollar, the British pound, and the Canadian dollar. These economic impacts are immaterial in comparison to the tragic loss of life suffered in China, but market shifts caused by the virus could have long-lasting effects on these foreign currencies.

United States (USD)

The United States’ status as an economic safe haven has enabled the US dollar (USD) to perform strongly while many of its counterparts have stagnated or slumped. With coronavirus worries causing volatility in several major currencies, many traders have thrown their weight behind the secure option of the USD.

The dollar also has a clear advantage over other traditionally reliable currencies, such as the Swiss franc and the Japanese yen. Switzerland and Japan are more dependent on China for business, whereas the US is less reliant on China as a trading partner. A positive domestic jobs report also bodes well for the USD in the immediate future, indicating that the currency looks well-placed to carry on being a safe haven for traders.

Once the coronavirus scare concludes, investors may look to get back on the potential for high growth that can be found with riskier currencies like the Canadian dollar. However, the USD continues to be attractive to traders while uncertainty reigns.

United Kingdom (GBP)

The UK is not as directly vulnerable to a loss of trade with China as other European economies, with the British pound (GBP) acting as a mini place of refuge in Europe. The GBP rose as many currencies fell in the immediate aftermath of the coronavirus outbreak, then fell itself as other markets adopted a more optimistic stance. That saw the GBP fall against several major currencies, although the coronavirus is far from the only factor influencing British economic growth.

The looming possibility of the severe impact of Brexit during its transition period, which is set to come to a close by the end of 2020, has some investors operating with caution. Proposed interest rate cuts, possibly arriving in March 2020, would make this low-yielding currency unappealing to traders. The strength of the USD also has analysts advising that traders short-sell the GBP on any live account with international forex brokers, given the long-term downside risks for the GBP in major currency pairs.

While the GBP may be less affected than other currencies in terms of direct consequences from the coronavirus outbreak, the overall market uncertainty has created an environment in which the GBP will struggle to flourish.

Canada (CAD)

Canada’s reliance on oil as an export and China as a trading partner means that the economic impact of the coronavirus outbreak has been significant in the North American nation. The Canadian dollar (CAD) slumped to its lowest level against the USD for two months, driven by diminishing demands for crude oil in the early weeks of 2020.

Sinopec Corp, the world’s largest crude oil importer, reduced its intake by 12%, the sharpest decline in over ten years. This has sent oil prices spiraling downwards, with levels at the start of February around $10 lower than economic forecasts had anticipated. A robust jobs market in Canada may lessen the blow of reduced oil demand, although its position as the nation’s biggest export means that some negative consequences are unavoidable.

If the virus scare endures, then investors will show further reluctance to back the CAD. Canada’s reliance on oil exports makes it more susceptible to events in China than most, but this also gives the nation a distinct advantage. Any positive news coming out of China will give the CAD the opportunity for an immediate upsurge, something that traders will be monitoring closely.

The potential upside of the CAD, and the long-term reliability of the USD, will make these two currencies appealing to investors, either as an immediate trade or as one to watch. Conversely, the outlook is more troubling for the GBP, although possible interest rate cuts may lay the foundations for economic recovery.

Crucially, the continuation of the coronavirus scare will ensure that markets will be operating with a greater degree of uncertainty than usual, which will likely encourage more cautious trading behavior.

The subject matter and the content of this article are solely the views of the author. FinanceFeeds does not bear any legal responsibility for the content of this article and they do not reflect the viewpoint of FinanceFeeds or its editorial staff.