The coronavirus outbreak is generating growing concern as new cases are identified on a daily basis. The health of the global population – and of the global economy – are at risk.
We have seen the connotations of the virus throughout the economy and as fears for a pandemic are rising, China along with other countries are putting in place procedures to protect the economy. China’s central bank has already injected tens of billions of renminbi into the economy – to prevent the growth rate from falling too quickly. However, there are no signs of the virus slowing down and in fact it’s now beginning to have a global impact. Not only is China experiencing travel restrictions, retail losses and currency falls, but all around the world, mobility is being restricted due to quarantine measures and businesses are being affected – with shops losing considerable business.
How has the coronavirus affected the global economy?
It’s no secret that there is widespread concern around the outbreak’s potential damage to the global economy. China is a key player and the global economy faces threats from multiple channels.
Due to the crucial role China plays in the supply chain as the largest exporter and second-largest importer of goods, trading countries are experiencing a disruption to the flow of supplies both in and out. Factories closing and travel restrictions have resulted in a drop-in company revenue for many suppliers, manufacturers and retailers. For example, in a recent investor update Apple stated they do not expect to meet the revenue guidance provided for the March quarter due to the coronavirus.
Additionally, financial markets globally continue to fall as countries try to prevent further spread by restricting mobility. These efforts are having an impact on a wide range of sectors, including tourism, transport, retail sales, and education, as well as changes in investment activity and supply shortages. According to the consultancy Capital Economics, as the outbreak continues, the possibility of turning into a global pandemic increases, resulting in serious implications for world trade, markets and currency crises.
What impact has this had on the foreign exchange market?
Within the financial markets, foreign exchange has been hit particularly hard, especially the currencies of emerging countries.
Not only are investors increasingly seeking out the safety of hard currencies, such as the dollar, but prices for commodities like coffee and oil are causing serious setbacks. The price of coffee has fallen by 18% as major coffee chains close down thousands of Chinese branches. This price drop has seen major coffee exporters, for example Brazil, experience significant implications to the economy. Due to slower Chinese growth, it isn’t just coffee that has dropped in value, industrial metal prices have also seen a sharp decrease. For Brazil this is bad news, as one of the main industrial metal exporters the economy has been hit twice as hard. Overall the Brazilian real has lost 6% of its value against the dollar within a few weeks.
Mobility restrictions are also having an effect on the forex market of petrostates, as the expectation that residents of China will not be taking to the roads due to lock down and self-quarantining. Oil prices have dropped nearly 14%, and as China is known to be the biggest importer of oil, this has wider implications on the global economy. The sharp decline triggered a 5% drop in the Russian rouble against the dollar within the last three weeks of January. Surprisingly, this has not had the expected effect on the renminbi itself, in fact, there has only been a mild decline in the loss of value in the Chinese renminbi. The Chinese currency has demonstrated its resilience when compared to other emerging currencies – holding to around 2% against the dollar.
Have ‘hard currencies’ also taken a blow?
Indeed, it’s not only emerging countries’ currencies that have been hit hard by the coronavirus, in fact, a number of ‘safe haven’ currencies have also felt the brunt of the virus.
As economies are increasingly affected, with the ramifications being seen travelling west, measures are put in place to instil a sense of confidence that an adequate solution will be found. For example, the confidence in the Euro by the European Union, has remained untouched, however, this presents a major challenge. At the beginning of 2020, the euro’s value fell by 3.7% compared to the US dollar, over a period of just 35 trading days. A comparable price and time ratio occurred halfway through November 2018, followed by a temporary recovery ending in January 2019 after the falling 120-day average was briefly exceeded.
The number of ‘safe haven’ currencies has narrowed and currently just the US dollar and the Swiss franc are placed in this category. Currencies traditionally viewed as more resilient have been significantly impacted, for example the Japanese yen and the Euro secure limited support.
Why have we seen a resilience of the Chinese currency?
The strikingly small loss in value of the renminbi can be attributed to the limited leeway the Chinese authorities allow in relation to currency. Within China, there are restrictions around large amounts of money when doing business. In order to convert large amounts to or from renminbi, the government would need to authorise the conversion. These measures were put in place to prevent speculators from mounting an attack on the renminbi, meaning it is not permitted to fluctuate much against the dollar. However, this approach was not favoured by the US, in fact, they labelled China as a ‘currency manipulator,’ although this
accusation was quickly withdrawn as part of the trade agreement between the two countries in January.
Even though we’ve seen a mild drop in value of the renminbi compared to other countries, this has not prohibited the effect on the global economy. Significant events will continue to cause a ripple effect across contrived as economies are so heavily interlinked.
Pierre-Antoine Dusoulier, Founder and CEO, iBanFirst