Coronavirus and currency: Why is the market volatile?
With hourly coronavirus headlines and significant currency volatility, you may be wondering what the link is, and why markets are moving so dramatically. We explain why exchange rates have shifted so quickly, to help you make more informed currency decisions.
Markets don’t like uncertainty
It could be an election with the threat of a new government, it might be increasing geopolitical tensions, or it could be a force majeure event—like COVID-19. Events like these can put a dampener on trade, create a decline in the demand for commodities (such as oil), and cause people to stop spending, which puts a strain on economic growth.
In the case of the coronavirus, there’s been a notable decrease in travel, putting significant pressure on the aviation industry. Meanwhile, social distancing and quarantine situations are causing high street footfall to decline, meaning retailers are shutting their doors to operate online—whether they’ll all open again remains to be seen. The UK government measures to close pubs, restaurants, and theatres which will curb economic activity, could see less consumer spending as people are staying indoors for longer periods of time.
The possibility of a global recession
While the UK could face a recession, so could the global economy. Goldman Sachs and Morgan Stanley have both suggested that the coronavirus has ignited a global recession—the first since the Global Financial Crisis of 2008. However, at present, neither forecast the effect to be as bad as the financial crisis. Economic data has been taking a hit; German investor confidence dropped to levels not seen since the European debt crisis, and data from before coronavirus measures ramped up showed UK unemployment rising, and US Retail Sales marking their largest decline in a year in February. Meanwhile, with a lack of demand for transport, oil prices have hit their lowest levels since around 2002.
Central banks are cutting rates and starting stimulus
Central banks around the world are leaping into action to limit the impact of the economic coronavirus effect. The Federal Reserve initiated two interest rate cuts in March alone, as has the Bank of England, while other banks such as the Reserve Bank of Australia, Reserve Bank of New Zealand and Bank of Canada all cut rates too. The European Central Bank, whose interest rates are already in the negative, didn’t make another cut, but instead bolstered its significant quantitative easing programme. Usually, a rate hike allows a currency some opportunity to gain, while a rate cut sees investors get less return on their funds, so the respective currency can be sold off. Governments have also been adding fiscal stimulus, to help businesses survive, and emerge the other side.
While the picture may be uncertain, a rebound is likely to take place as coronavirus cases ease. Actions by governments and central banks around the world are seen as positive attempts to offset the impact of the pandemic. Speaking to a currency specialist while moving your money abroad during times of volatility can help you maximise your foreign exchange transfers.
If you'd like to talk to us about how recent market moves could affect your FX requirement, call to speak to one of our experienced currency experts, on +44 (0)20 3465 8200 for corporate payments, or +44 (0)20 7989 0000 for personal currency transfers.