We take look at the latest updates on the currency markets in light of the coronavirus pandemic. With hourly updates and significant currency movements, you may be wondering what the link is, and why markets are moving around so much. Currency specialists Global Reach explain why exchange rates have shifted so quickly, to help you make more informed decisions about currency.
Markets don’t like uncertainty
It could be the threat of a new government from an election, it might be increasing political tensions in the world, or it could be what is termed a ‘force majeure’ event—like the coronavirus pandemic. Events like these can quash trade, cause a decline in demand for commodities, including major trading goods such as oil, and cause people to stop spending, which can have a major effect on economic growth.
In the case of the coronavirus, there’s been restriction in travel, putting major pressure on the aviation industry. Meanwhile, social distancing is causing further significant decline in the high street, meaning retailers are shutting their doors to operate online or not at all —whether they’ll all open again remains to be seen but the signs are many won’t. The UK government measures to close pubs, restaurants, and theatres which will bring a stop to economic activity and less consumer spending, as people are staying indoors for longer periods of time.
Is a global recession possible?
It’s possible the UK could face a recession, so could the global economy. Morgan Stanley and Goldman Sachs have both suggested that the pandemic has ignited a global recession—the first since the financial crisis of 2008. However, at the moment neither forecast the effect to be as bad as that financial crisis. Economic data has been taking a hit; Investor confidence in Germany has dropped to levels not seen since the European debt crisis, and data from before the covid-19 measures scaled up showed UK unemployment rising, and retail sales in America marking their largest decline in a year in February. Meanwhile, with a significantly reduced demand for transport, oil prices have hit their lowest levels since around 2002.
Central banks are cutting rates to ease the situation
Central banks around the world have sprung into action to limit the impact of the economic effect of the coronavirus measures. The American Federal Reserve and Central Bank of England initiated two interest rate cuts in March, while other banks such as the Central Banks of Australia, New Zealand and Canada all cut rates too. The European Central Bank, whose interest rates are already in the negative, increased its significant quantitative easing programme. Usually, an uplift in rates allows a currency some opportunity to gain, while a rate cut sees investors get less return on their funds, so a currency can be sold off.
While the picture may be in the long term, a rebound is likely to take place as coronavirus cases ease, which could create further currency movements. As the world moves from the current travel restrictions and people are able to move freely again this should have a positive impact on the exchange rates. I think it’s fair to say we look forward to the time we can all take our holidays again whatever the exchange rate!
Thanks to Euan McLachlan at Global Reach for the insight.