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As the Coronavirus pandemic unfolds and global travel plans are halted, the world economy has already suffered a series of negative shocks. Dramatic market movements indicate that the markets are not confident in government efforts to curb the virus. Foreign exchange is no exception, in the context of both travel money and FX trading. In this sense, the impacts are twofold: the direct effect on retail FX arising from cancelled travel plans and the macroeconomic effects from heightened uncertainty.
As is often the case in times of economic crisis, there has been a global increase in demand for USD following the outbreak of COVID-19. Due to its status as the international reserve currency, the dollar is seen as a safe haven and investors are flocking to US Treasury bonds to provide a safer, more liquid investment. Couple this with the selling of other assets, it is easy to see why the USD rate has rocketed. The Federal Reserve reduced the interest rate by 50 basis points in an attempt to boost confidence, and where this usually is met with a currency depreciation, USD value continued to increase. The $700bn quantitative easing program also announced likely had something to do with this.
The European Central Bank does not have the flexibility the Fed does in reducing interest rates, which have been at record lows since 2011. Several European economists have also cited concerns that European banks and financial markets have still not fully recovered from the last crisis. The ECB shocked markets last week however by uncharacteristically announcing a €750bn plan to buy government and company debt across the Eurozone. As with the US, this monetary stimulus is in the hope of keeping businesses afloat and easing market uncertainty. The EUR/GBP rate, not to mention European bond markets, rallied at the scale of this intervention. With the goal of reducing the financing costs of governments from Italy to Greece, ECB president Christine Lagarde reassured the continent, “there are no limits to our commitment to the euro.”
In comparison to USD, the “safe haven” currency, the pound has arguably been more towards the opposite end of the spectrum for some time, thanks to ongoing Brexit developments. The (GBP/EUR) rate did see a boost however following Boris Johnson’s announcement (March 18th) that the government would pay 80% of employee’s salaries in the event that businesses were pushed to make redundancies. The Bank of England has pursued a similar monetary policy strategy to the US, cutting interest rates to their lowest level ever and announcing a £200bn quantitative easing program. News of harsher lockdown rules on Monday 23rd saw a further devaluation of the pound relative to both EUR and USD.
As the world economy hits dark milestones, reminiscent of the 2008 global recession, there is some hope arising from the fact that this did not start as an economic crisis. With banking markets still intact, this should mean that the financial sector is able to bounce back more quickly than last time, once the health crisis subsides. Furthermore, as a result of the 2008 crisis, banks are now less exposed to shocks due to increased regulation in the industry. The travel industry and demand for FX is also likely to see a strong recovery, the question is when this will be. It is also possible that passenger preferences and perception on travel to certain destinations may shift, and CMS Analytics will be continuously monitoring these trends going forward.
