Manic Monday - Heightened FX volatility and a race to safety
Almost without exception, EM currencies are falling, and the risk-off currencies are gaining (USD, CHF, EUR, JPY). Many EM currencies are "commodity" currencies, such as CAD, ZAR, BRL, MXN and RUB, which reflect whether the world economy is expanding or contracting. With travel restrictions impacting manufacturing, tourism and even the ability to get to work, WW economic growth looks to be halved for 2020.
While EM depreciation has been a long-term trend since the beginning of 2018, the last few days have dramatically accelerated this trend. In just the last three trading days, ZAR has lost almost 5%, BRL has lost 5.6%, and MXN has lost 10.5% against the USD! It's likely to get worse, as EM countries are least-well equipped to handle pandemics or financial stresses. By contrast, CHF has gained 2.8%, and JPY has gained 4.8% against the USD in the same three days.
Using volatilities over the last 20 days (one trading month), the following Value at Risk (95%) for some representative EMs:
Effects on economic growth:
Data is already reflecting supply shocks. The February 2020 read of China’s key index of factory activity, the Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI), showed its lowest level on record.
The number of new US cases reported rose 118% on March 5th. That accelerating growth is indicative of an exponential curve. The number of daily new cases rose by 109% in Germany and by 89% in France over the past two days. In short, the virus is spreading at an exponential pace in the G7 nations, which will have an outsized effect on the world economy.
The US, China, Japan, Germany, Britain, France, and Italy account for:
60% of world supply and demand (GDP)
65% of world manufacturing, and
41% of world manufacturing exports.
In a downside scenario, where the novel coronavirus spreads over the northern hemisphere, the 2020 world GDP growth might be reduced by as much as 1.5%.
Here are a few representative EM spot histories:
The RUB in particular has stolen most of the limelight after breaking their OPEC pact and entering a price war with the Saudi's. Oil dropped to as low as $27.50 (31% drop). The Irony is that Putin came out as recently as March 2nd saying that he was happy with current pricing and wasn't against the OPEC supply cuts.
The EUR and GBP have reacted in interesting ways. EUR has spiked upwards vs USD, and GBP remains relatively unmoved.
Both show relatively low volatility, with GBP slightly higher.
Finally here are the other two risk-off currencies, JPY and CHF, showing significant appreciation against the USD in just the last three days:
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