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Biggest currency movers of the coronavirus crisis – what next for exchange rates?

business-articles Biggest currency movers of the coronavirus crisis – what next for exchange rates?
Over the course of 2020 the coronavirus crisis has created significant uncertainty in financial markets, with many countries facing an unprecedented slump in growth as a result of lockdown measures.

Concerns over what has been billed as the worst global recession since the great depression have been reflected in dramatic volatility in the currency market in particular – but some currencies have been hit harder than others.

USD – Boosted by safe-haven demand

Without a doubt, the US dollar has been the real currency winner of the coronavirus crisis, with jittery investors flocking to the safe-haven currency in reaction to heightened uncertainty.

The upswing in USD exchange rates was particularly dramatic in March as the US dollar’s status as the world’s reserve currency, combined with high demand for cash and fears over a liquidity shortage, exacerbated demand for the US dollar and propelled it to multi-year highs.

However, the US dollar subsequently slipped from its best levels as unprecedented monetary and fiscal stimulus from all the major economies helped to cap safe-haven demand. Skyrocketing US unemployment also took some of the shine off of the ‘greenback’, as did the gradual reopening of US economies.

GBP – Pound pummelled by coronavirus concerns

The pound has been one of the currencies hardest-hit by the fallout from the coronavirus crisis as criticism over the UK government’s initial response to the pandemic and Brexit concerns created a perfect storm. Sterling’s downward spiral saw GBP/USD plunge to a 35-year low in the early stages of the crisis.

Sterling sentiment was also hit by Boris Johnson’s own period of illness, with GBP investors unnerved by the PM’s stint in intensive care after contracting the coronavirus in April.

EUR – Lack of EU unity leaves euro struggling

The euro has also stumbled during the crisis, albeit not as acutely as the pound. With Italy, Spain and France all recording dramatic numbers of infections and fatalities, the currency bloc went into lockdown.

The sudden drop in output brought the Eurozone economy to its knees, and the situation highlighted cracks in the EU itself.

Most damaging for the single currency has been the lack of solidarity in the EU’s financial response to the pandemic, with northern states rejecting calls for common debt ‘coronabonds’.

Risk-sensitive currencies

Given the heighted uncertainty surrounding the coronavirus crisis and fears of a deep global recession it’s unsurprising that emerging-market and higher-risk currencies have borne the brunt of the market sell-off in recent months.

Of particular note has been the Brazilian Real, which dropped off a cliff as a result of Brazilian President Jair Bolsonaro’s handling of the health crisis.

Further damaging the appeal of commodity-linked currencies was the dramatic collapse of US oil prices in late April. Investors were left spooked after worries over weak global demand saw WTI crude prices turn negative for the first time in history.

Our forecast for the remainder of 2020

Looking to June and beyond we can expect the coronavirus crisis to continue to act as a major catalyst of movement in currency markets.

As a consequence, investors are likely to continue to favour the perceived safety of the US dollar – as least until the global economy looks to be back on the road to recovery.

Phil McHugh, Chief Treasury Analyst at Currencies Direct, suggests:

‘USD is likely to remain strong across the markets until we move out of this consolidation phase into a confident phase of recovery. If the virus does not bite hard for a second time and the global recovery starts to gather pace we should see an associated move back out of USD.’

However, an escalation of tensions between the US and China could bolster demand for USD. Donald Trump’s criticisms of Beijing’s handling of the coronavirus outbreak and its plans for a new security law in Hong Kong are likely to conjure up concerns of a fresh trade dispute.

Meanwhile, the potential for the pound to recover this year looks limited as the spectre of Brexit and a potential coronavirus resurgence hang over the currency.

McHugh forecasts:

‘The key risk for the pound moving forward is a second wave of the virus and additionally the cloud of Brexit. In relation to Brexit, negotiations are scheduled to start again in June but there are no signs of any delaying of the extension period which leaves little time and the risk of a hard exit on the table.’

The euro’s outlook looks the rosiest at this time given that Europe started easing lockdown restrictions ahead of the UK and the US, and the Eurozone economy is positioned to bounce back with the aid of the EU’s ambitious €750bn recovery fund.

However, longer-term lingering questions over the unity of the EU could limit the potential upside in the single currency.

McHugh predicts:

‘The long-term risk for the euro is the perceived cracks between individual countries and the European Union during this crisis, if these deepen over time it could test the stability of the union.’

Given the unprecedented nature of the current situation these forecasts are subject to change, but our team are on hand if you’d like to discuss the latest market movements or our projections for the months ahead.

If you have FX requirements we can help you maximise your returns and protect your profit. Get in touch with our team on [email protected] or call +44 (0) 20 7847 9400.
Currencies Direct

Currencies Direct

Currencies Direct is one of Europe's leading non-bank providers of currency exchange and international payment services. Since we were formed in 1996, we've maintained our focus on providing innovative foreign exchange and international currency transfer services to corporations of all sizes, online sellers and private individuals. We have also expanded our services to provide dynamic and pioneering "business to business" solutions to help companies, tier 2/3 banks and other non-bank financial institutions to process their international payments. Our headquarters are in the City of London (United Kingdom) and we have operations in continental Europe, Africa, Asia, and the United States. Currencies Direct is jointly owned by private equity firms Palamon Capital Partners and Corsair Capital.

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