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Increased Volatility in Financial Markets as COVID-19 Surges

Source: CBOE VIX Options

Stock markets, futures markets, and general business sentiment have taken a pounding since the devastating coronavirus outbreak, more recently renamed COVID-19. After a semi-rally mid-week, stock markets have retraced and surrendered gains on the back of an avalanche of negative data vis-a-vis the latest virus from Hubei providence in China. The Dow Jones Industrial Average, the NASDAQ Composite Index, the S&P 500 index, and many futures markets retreated across multiple trading sessions.

While the number of new cases continues to grow at an alarming rate, the number of infections has already exceeded 60,000+, with the death toll in excess of 1,350+ people. Traders and investors wasted no time dumping stocks en masse, and short-selling options as they fear the worst. Among the biggest beneficiaries of this global uncertainty are forex markets. Foreign exchange volumes now exceed $5.5 trillion per day, with heightened trading activity in recent weeks as speculators jockey for position.

Source: VIX Volatility on Currencies CBOE

The VIX (volatility index) is a powerful barometer of investor sentiment. The higher the figure, the greater the volatility. In recent weeks, the VIX number has risen sharply, indicating increased fears in the financial markets which typically bodes well for safe-even commodities like gold and currencies like the JPY. There is significant volatility in currency pairs, as indicated by the CBOE index.

For example, the JPY/USD pair is slightly up for the week ending February 14, 2020, in line with expectations. The latest infection numbers sent European markets into the red, reigniting fears of the dangers of this pandemic. Gold bullion is one of the few beneficiaries of increased global economic malaise. Gold futures climbed on the news, rising several dollars for delivery in April. At the time of writing, gold was selling at $1574 per ounce as general risk aversion to stocks found a refuge in the world's premier precious metal.

Which Currency Pairs Are Up & Which Currency Pairs Are Down for February?

Source: MarketWatch US Dollar Index (DXY)

The US Dollar Index serves as an important measure of the relative strength or weakness of the USD. Currently, the US Dollar Index (DXY) is at 99.09 (February 13, 2020). The 1-month performance of the US dollar index is 1.81% +, indicating that the USD has appreciated relative to other currencies for the year. In times of global economic uncertainty, the US dollar still has ranking status over other currencies. By deduction, forex traders have been buying USD and selling other currencies. This is evident in the year-to-date appreciation for the greenback (+2.80%).

Source: JPY/USD (Week Ending February 14, 2020)

  • The coronavirus outbreak has had a devastating impact on the Thailand economy which is heavily reliant on China. The Thai baht was the strongest performing currency in Asia in 2019, and is now the worst performing currency in the region. It depreciated by over 4% to the USD in 2020, relinquishing 50% of its gains against the USD in 2019.
  • The EUR/USD currency pair is forecast to move lower on expectations that the European Central Bank will slash interest rates. If this occurs, demand for EUR will decline and investors will actively seek out USD and GBP. Credit Suisse analysts have cautioned about the devastating impact that COVID-19 has had on global economic activity. That the EUR/USD rate has fallen below 1.09 (a key support level) is alarming. If the ECB follows through on expectations and slashes interest rates by 10 basis points, this will have an instant effect on currency markets.
  • If equities markets don't react to the coronavirus outbreak as expected, they will benefit and the JPY will suffer. However, if equities markets sell off then a shift towards safe-haven currencies will take place and the JPY will benefit. Slight gains have been realised heading into February, but retracements have resulted in all gains being forfeited.  Currently, the 50-Day MA (0.915) is beneath the 200-Day MA (0.922).

The current market volatility is a consequence of geopolitical concerns. Any positive news will stabilize equities markets, sour gold, and have varying effects on currencies trading. For now, the strength appears to be with the majors, as fears run rampant with minor and exotic currencies.



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Peter Davidson

Peter Davidson

Business Consultant

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13 Dec 2018


New York

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