Making sense of the pandemic and its impact on currencies
Now, the whole world is living in a new reality that was created due to the coronavirus pandemic. Safety and health of each person in our planet is of primary importance today. However, the virus outbreak turned out to be an unexpectedly prolonged process even in developed countries.
Thus, we have all reasons to claim that people will have to live under the current conditions for a long period of time. Economic and financial consequences largely depend on the pandemic period and the restrictive measures duration.
Nowadays, nobody cannot think of a world without the single currency as it was in the 90s. We cannot even imagine what dynamic the Italian lira and the Spanish peseta would have shown in March. Moreover, unlike the US dollar, these currencies were not often used as reserve ones.
Nevertheless, they are no longer in circulation and we will analyze only real trading instruments.
The most alarming situation is in the US, where Donald Trump declared a major emergency in all 50 states. If the situation deteriorates, the US economy will stagnate.
The banking segment is expected to be damaged first after the real sector. The share of bad loans is likely to snowball. It is obvious that millions of the US citizens and thousands of companies will not be able to pay off loans during the total lockdown.
Following the banking system's collapse, investment funds will be the next sector to suffer from the virus. These funds withdraw large sums of money from federal and social projects. In this case, the US Fed will be forced to print both money and government debt obligations.
China, in its turn, will continue purchasing Treasury bonds making it incredibly hard for the US president's administration to meet its financial obligations.
Even under such terrible conditions, the US dollar may keep its current position. The fact is that the US economic slowdown or even its stagnation will reduce consumption of already cheap energy resources. This, in turn, may eliminate the speculative component in oil quotes.
Usually, when oil prices drop, the US currency gains ground. During the pandemic peak in the US, oil priced at even $10-12 a barrel would not boost the dollar. However, this level could be enough to prevent it from falling.
Besides, the US dollar is popular due to its relative stability during and may be even after the pandemic. The world needs a permanent symbol of stability such as the US dollar and may be the euro. Oil cannot be used for that purpose. Germany is the main supporter of the single currency. It once again proved that it is Germany that defines the euro's value.
Currencies of developing countries may face rather gloomy future. The fact is that investors are likely to buy stable currencies, including the US dollar and the euro, or safe-haven assets such as gold and some currencies, including the Swiss franc and the Japanese yen. As a result, low oil prices and the coronavirus outbreak are of minor importance in this issue.
Despite the fact that the currency market is rather calm, the trade during the pandemic is still exciting. There are not a lot of swings. However, the news trading is becoming more and more popular and allows market participants to gain money even within one day.
News about coronavirus have the following influence on quotes. If a number of new virus cases advances, there is greater demand for safe-haven assets and currencies. If a number of infected people reduces, investors switch to currencies of emerging markets.
In case of the US dollar, the situation is a bit different. If there is a jump in a number of infected people, the greenback drops by 1-2%. However, it usually quickly recoups its loses.
This article was written by InstaForex Group.
