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The Week Ahead in FX Markets – Global markets feel under the weather, and so does the NZD

Published February 24, 2020

By Phil Lynch

Markets are continuing their flight to safety, and the New Zealand dollar remains on the back foot as a result. Globally, there are now 78,338 confirmed cases of the virus, with a total of 2,453 deaths. Concern remains that the virus will take hold in parts of the world that are not well placed to manage it – resulting in a more rapid global spread.

Meanwhile, there are as many as 500 million people in China who are currently affected by policies put in place to restrict spreading the disease any further.

The virus is now spreading more rapidly into South Korea and Japan, with 346 and 105 reported cases respectively. Whilst the number of cases is low, it is the knock-on containment effect that is causing the most damage. As governments around the world grapple to implement containment policies, global markets are really starting to feel the effect.

  • Global stocks sold off on Friday, with the U.S. share market having its worst daily decline in about three weeks
  • Gold prices (a proxy for investor safety) have hit USD $1,643 – the highest level since 2013
  • Oil prices remain subdued, currently close to USD $53/barrel well below the RBNZ’s expected USD $60/barrel
  • New Zealand companies are starting to report the effect, with Air New Zealand forecasting a hit of between NZD $35-75 million
  • NZD/USD Option market volatility has jumped close to 5% since Friday (an indicator that markets expect additional volatility)
  • The ‘VIX’ (Volatility Index) remains more elevated, at around 17% vs 12% in December 2019
  • The NZD on a trade weighted basis is down 3.4% so far in 2020, and the NZD/USD is down 6.2%

All of that said: The fear and uncertainty surrounding this virus will almost certainly dissipate at some point in the future.  It may come as a result of a vaccine being announced, or the death rate falling considerably, or through containment. Or it could just be through time. For now, however, markets are taking almost every cue from the virus – and it is a good time to remember the famous Keynes quote:

“The market can stay irrational longer than you can stay solvent”

Hedging against FX risk can be risky in times of such uncertainty. One popular product is the Vanilla Option. It offers complete protection against adverse currency movements, with no obligation on the contract other than a small premium to pay. If you would like to learn more about these, or would like to consider some live pricing – please contact your FX dealer today.

The Week Ahead

The local highlight this week will be Thursday’s ANZ Business Confidence survey. It’s possible this survey will reflect the uncertainty surrounding the coronavirus so we could see some additional volatility when this survey is published.

Elsewhere, markets will be watching U.S. Consumer Confidence numbers on Wednesday morning, and Chinese Manufacturing PMI on Saturday afternoon. Both may take a hit amidst the current turmoil. Other market events may not draw as much attention, given they are for previous periods when the coronavirus had not yet taken effect.