Coronavirus, formally known as Covid-19, emerged in China in December 2019. At the time of writing on 29th March the virus has killed over 33,000 people worldwide and infected more than 719,000. The numbers are still escalating rapidly.
Since coronavirus first emerged, the epicentre has moved from Wuhan, China to Lombardy, in Italy which experienced just shy of 100,000 infections and 10,779 deaths. Fears are growing that the US could quickly become the new epicentre for the disease as the number of deaths surpasses 2,400 and the number of confirmed infections tops 140,000.
As governments battle to save lives and slow the spread of the killer virus, the economic impact that coronavirus is expected to have on the US and Eurozone economy, in addition to its impact on global risk sentiment has injected high levels of volatility into EUR/USD.
What is the coronavirus impact on the US?
Social distancing and quarantine measures are being implemented across the US with some cities on complete lock down. Schools are closed, people are working from home, the service sector, which accounts for around 80% of economic activity in the US has ground to a halt; restaurants, bars, gyms, the tourism trade, non-essential manufacturers in some cases non-essential shops have temporarily closed. The very measures that the government is implementing to protect the American public from coronavirus, is causing demand for goods and services to evaporate. The US is experiencing a sharp demand shock.
The coronavirus outbreak in the US escalated at the end of February. Therefore, economic data is only just starting to show the impact that the virus is having on the economy now.
US initial jobless claims data showed the magnitude of the economic devastation being wrought by the coronavirus pandemic. The US government reported an unprecedented surge in the number of people seeking jobless benefits. A total 3.3 million filed for unemployment insurance in the week ending 21st March this eclipsed 281,000 the previous week and was over 4 times higher than the previous number of record claims of 695,000 in 1982 and 665,000 in March 2009, in the financial crisis.
When people lose their jobs or fear losing their jobs, confidence plunges. Data from the University of Michigan has confirmed the sharp drop in consumer confidence. When confidence declines, consumption drops. This could result in the demand shock that the US is experiencing being prolonged.
Both the US Federal Reserve and the US administration have taken measures to cushion the blow of coronavirus to the US economy. The Fed has slashed interest rates by a total of 150 basis points to 0% – 0.25%, whilst announcing an unlimited bond buying programme in addition to other measures to ensure there are plenty of US dollar sloshing around the system, preventing any blockages.
Meanwhile US Congress has agreed to a $2.2 million rescue plan to support businesses and individuals affected by the crisis in an attempt to soften the blow on the US economy.
Analysts at JP Morgan are predicting US GDP of -10% on an annualised basis in the first quarter whilst the estimate for the second quarter is a contraction of between -14% – -25% despite the Senate’s herculean stimulus effort. That said, economists generally agree that they expect a similarly rapid recovery in the second half of the year.
How does coronavirus affect Dollar?
At different stages of coronavirus outbreak, the dollar has been affected in different ways. Firstly, the US Dollar is the reserve currency of the world. This means that in times of economic stress investors sell out of riskier assets or perceived riskier currencies and buy into the dollar for its safe haven properties. Businesses also hoard dollars in fear of tougher times to come. This pushes the value of the US Dollar higher.
The Federal Reserve promising unlimited quantitative easing and the Senate $2.2 trillion fiscal stimulus package have served to ease fears in the market and lowered the value of the dollar. Market participants believe that there could be more stimulus to come. This could ease the value of the Dollar further.
However, it is also worth noting that the coronavirus outbreak is still escalating in America. The situation is expected to worsen before it improves. Should investors become more nervous or in the case of a second wave of outbreak in China now that Wuhan, the original is coming out of lock down, then the dollar could push higher again.
How does coronavirus affect the Euro?
The euro typically falls in times of economic stress. However, as the coronavirus outbreak spread beyond China, the euro initially advanced. This was because a lot of banks and traders were closing out short positions, or negative bets, that they already had against the euro prior to the outbreak (owing to the ECB’s very low interest rates). As those bets folded and positions were closed, the euro pushed higher.
Large parts of Europe are now in lock down. Business activity has plummeted by the most on record. The impact on the already very fragile eurozone economy is expected to be huge, which will weigh on demand for the common currency. The longer the lockdown continues the less likely it will be followed by a rapid economic recovery.
The European Central Bank hasn’t cut interest rates because rates were already in negative territory. However, the ECB has promised unlimited bond buying to prop up the economy. Individual countries within the eurozone also have more power to boost fiscal stimulus to boost the economies.
Euro to dollar coronavirus impact?
Up until early February, EUR/USD was holding steady at US$1.08. As the outbreak escalated outside of China, the Euro US Dollar exchange rate received an injection of volatility. The pair soared to a 13 month high of US$1.1496 before crashing 860 points in 2 weeks to an almost 3 year low of US$1.0636.
EUR/USD has recovered as central banks have pledged unlimited support and is trading back over $1.11. This is unlikely to be the end of volatility in the pair given that the outbreak in Europe and the US still has a way to run.
