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The Week Ahead in FX Markets – Panic in foreign exchange markets

Published March 2, 2020

By Phil Lynch

Panic has its grip firmly on markets, with the New Zealand dollar in near free-fall in reaction to the COVID-19 coronavirus. Since Friday’s opening levels, the kiwi has fallen:

  • 2.0% against the greenback
  • 2.4% against the euro
  • 4.3% against the yen

Commodity based currencies like the New Zealand, Aussie, & Canadian dollars are all bearing the brunt of the damage, but it is the kiwi that has taken the largest hit since Friday morning. The ‘flight to safety’ is very active in markets, with the Japanese Yen being the largest benefactor.

Not even a hinted rate cut from the U.S. Federal Reserve Chair Jerome Powell has been enough to support the NZD. Powell said the central bank will “act as appropriate” to support the economy in the face of risks posed by the coronavirus outbreak, though he said the economy remained in solid condition. The next rate decision from the Fed is just 2.5 weeks away, and markets are now pricing in a 75% chance of a 50 basis-point cut.

Typically – if the U.S. Federal Reserve abruptly changed their stance to be more dovish, the USD would plummet, resulting in net gains for the NZD. In this case – the USD has fallen, but the uncertainty surrounding the coronavirus has caused the NZD to fall a long way further, resulting in net losses for the NZD/USD exchange rate.

Other key market indices are also extremely volatile:

  • WTC (Oil) is at USD $44.78 per barrel – down 29% from 2020 highs.
  • Gold is at USD $1,584 per ounce – up 4.85% from 2020 lows (an indication of the flight to safety)
  • The Thomson Reuters Volatility Index (VIX) has skyrocketed to more than 40% over the weekend – the highest point since February 2018.
  • The Dow Jones Industrial Average is down 14.1% in just two weeks. Equity markets have lost $5 trillion dollars since panic broke out in markets
  • NZD 1 Year Option Volatility has increased by 25% from 2020 lows – an indication that markets are expecting stormy seas ahead.

Adding Perspective

It is important to prepare for the worst in these volatile times – but it is equally important to try and maintain some perspective – a market snapback is not only a genuine possibility; it is a likelihood.

The recent dramatic fall in equity markets has wiped out trillions of dollars of value – but those trillions of dollars were only added across the last 6-8 months as equity markets pushed through record highs over and over again. The current level of the Dow is still 80% higher than pre-GFC high’s, 293% higher than mid-GFC lows, and 14% higher than 2019 lows.

Globally, the number of confirmed cases has hit 85,403. However, 39,002 people have been confirmed as fully recovered, whilst 2,835 people have died. Currently – more people die of the influenza every two days than die of coronavirus.

At some point a vaccination is likely to emerge – and the impact of the coronavirus will be largely mitigated. U.S. Vice President Pence has said just six hours ago that clinical trials will be available in just six weeks.

For now – it is a waiting game.

The Week Ahead

Once again, the week ahead will be dominated by the volatility and uncertainty surrounding the coronavirus. It is likely the NZD will be at the forefront of currency market volatility, as has proven to be the case so far in 2020.

Outside of that, it will be worth watching the RBA Cash Rate decision due out tomorrow afternoon, to get a sense of how central banks are reacting. Markets have priced in an 81% chance that the RBA will leave rates on hold tomorrow – but it is likely they will provide their own insights into how they will react to the ongoing damage caused by the coronavirus – and expectations on the course for the RBA are set to change.

The week is rounded out with U.S. Non-farm Payrolls numbers. Markets are expecting 175k new jobs to be added for February – which will be an indication that at least one major developed economy is getting on with business amidst the turmoil.