January 28, 2020

Asian currencies showing some viral resistance

BY Olivier Desbarres

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( 13 mins)
Acceleration in spread of novel coronavirus


  • On 31st December 2019, the World Health Organisation (WHO) was alerted to several cases of pneumonia in Wuhan City in the Hubei Province of China. The virus did not match any other known virus. On 1st January Chinese authorities reported 40 cases.
  • On 7th January, Chinese authorities confirmed that they had identified a new coronavirus, a family of viruses that includes the common cold, and viruses such as Severe Acute Respiratory Syndrome (SARS) and Middle East Respiratory Syndrome (MERS). This new virus was temporarily named 2019-nCoV or novel coronavirus.
  • China’s National Health Commission said the main transmission mechanism is through respiratory droplets and then touch and the incubation period is thought to be between 10 and 14 days.


Asian currencies showing some viral resistance 8


  • The first death occurred on 9th January (and was confirmed on 11th January). The number of daily mortalities rose rapidly between 20th and 25th January but has since seemingly stabilised at around 25-30 (see Figure 2). The daily figure of reported cases has accelerated since 20th According to China’s National Health Commission, as of 28th January the novel coronavirus had infected 4,515 people and killed 106 in mainland China, a sharp increase from only 24 hours ago when 2,844 cases and 81 fatalities had been confirmed. There have been no reported deaths outside of China but dozens of other cases of infection have been reported in Australia, Cambodia, France, Germany, Hong Kong, Japan, Korea, Macau Malaysia, Nepal, Singapore, Sri Lanka, Taiwan, Thailand, the United States and Vietnam.
  • Chinese authorities on 23rd January confirmed that public transport in and out of the city of Wuhan, the epicentre of the outbreak, and neighbouring Huanggang had been suspended, only days before the Chinese New Year which began on 25th The ban on public transport has since been extended to the Hubei province and one hospital in the city of Tianjin (120km south-east of Beijing) has reportedly been put under military management.
  • SARS originated in China in November 2002 before spreading to over 30 countries, infecting around 8,400 people and killing about 800. On 5th July 2003 the WHO declared the SARS outbreak contained as there had been no new cases for 20 days although around 200 people were still hospitalized with the disease.


Novel coronavirus has so far had mixed impact on global financial markets

The impact on financial markets from the novel coronavirus outbreak has so far been mixed. Note that Chinese financial markets were closed for the lunar new year on 24th, 27th and 28th January and will only re-open on 3rd February.


Equity markets have posted sharp losses in recent days, albeit from very elevated levels

  • The Shanghai Composite Index fell 4.5% between 13th January (the high since 25th April 2019) and 23rd January but was only down 2.4% year-to-date.
  • The MSCI Asia Pacific Index fell 2.2% between 20th January (the high since February 2018) and 27th January but is broadly unchanged year-to-date.
  • The S&P 500 fell 1.6% on 27th January, its biggest one-day drop since 2nd October and the first time in 74 sessions that it has ended the day down more than 1%. However, the S&P 500 is down only 2.6% from its record high of 3,330 on 17th January and still up 0.4% year-to-date.


Oil price down on global growth concerns, gold price up but other factors also likely at play

  • The price of Brent crude oil, which was broadly stable around $65/barrel from 8th to 20th January has since fallen nearly 11% to about $58/barrel on concerns that the novel coronavirus outbreak will curtail domestic and international travel, trade and ultimately global economic growth.
  • The Dollar-price of gold has risen about 2.6% since 13th January and 4% year-to-date. However, it had already risen 3.7% between 10th and 31st December – i.e. before the WHO was notified of a possible viral outbreak, suggesting that other factors than the novel coronavirus have also been driving the price of gold higher, in our view.


Federal Reserve may have to address US bond market rally at its policy meeting tomorrow

US government bond yields were range-bound between early October and mid-January (see Lack of US market & macro volatility both reassuring and troubling, 17 January 2020). However, since 17th January, 2yr, 5yr and 10yr US government bond yields have fallen, respectively, 14bps, 20bps and 24bps (see Figure 2). The 10yr yield currently stands at only 159bp, a five-week low, with the record low at 137bps.

FOMC members have been near unanimous in recent months that the US economy is in a good place and that the current policy rate is appropriate even if still data-dependent. The consensus forecast is therefore that the Federal Reserve will keep rates unchanged at its policy meeting on 29th January and we would not expect it to comment extensively on the coronavirus outbreak at this stage. However, Chairperson Powell will likely have to address the recent rapid fall in US government bond yields and markets having upped their pricing of Fed rate cuts in 2020 to 35.5bp from 19bp a fortnight ago.


Asian currencies showing some viral resistance 9


Asia-Pacific currencies’ mixed but reasonably benign performance – a confluence of events

Asia-Pacific currencies have on the whole held up well (so far), as they did during the 2002-2003 SARS virus outbreak, and individual currencies’ performances can at least be partly traced back to factors other than the coronavirus outbreak.


Asian currencies showing some viral resistance 10


  • The high-yielding Indonesian has been the best performing major currency year-to-date, appreciating 1.8% versus the US Dollar (see Figure 3).
  • The Malaysian Ringgit and Indian Rupee are broadly unchanged. The Philippines Peso, Taiwan Dollar and Singapore Dollar have all posted losses of less than 1%.
  • The Chinese Renminbi was up 0.4% between 31st December and 23rd January since when markets have been closed.
  • The Thai Baht has been the worst-performing Asian currency depreciating about 3.7% versus the US Dollar.
  • A GDP-weighted basket of high-yielding emerging market currencies (BRL, COP, IDR, INR, MXN, RUB, TRY and ZAR) has weakened only 0.9%, according to our estimates.
  • The risk-sensitive Australian and New Zealand Dollars have depreciated 4.0% and 3.2%, respectively, which is at least partly attributable to these two currencies’ economies having close trade ties with China. However, wildfires in Australia have also likely contributed to the Australian Dollar’s underperformance while the 31st December marked a five month high for the New Zealand Dollar both versus the US Dollar and in Nominal Effective Exchange Rate (NEER) terms.
  • The Chilean Peso has depreciated the most year-to-date (-4.7%) but it has been weakening since early 2019 due to domestic political and civil unrest.
  • The South African Rand, Brazilian Real and Norwegian Krone are the next three weakest currencies. The Real and Rand’s underperformance could be partly attributed to Brazil and South Africa having strong trading links with China while the fall in the crude oil since 20th January (itself a by-product of the coronavirus outbreak) has weighed on the Krone. However, the Real, Krone and Rand have been depreciated since the turn of the year – when the coronavirus was still in its infancy – suggesting that other factors have been at play, including the SARB’s surprise 25bp rate cut on 16th
  • Notably, the safe-haven Japanese Yen and Swiss Franc are both flat versus the US Dollar.


Asian currencies showing some viral resistance 11


Unsurprisingly, in NEER terms, the performance of Asia-Pacific currencies has been even more benign (see Figure 4). The Indonesian Rupiah, Chinese Renminbi, Malaysian Ringgit, Indian Rupee are up year-to-date while the Philippines Peso and Japanese Yen are broadly unchanged. The Australian Dollar, Thai Baht and New Zealand Dollar NEERs have weakened “only” 3.4%, 3.3% and 1.9%, respectively.

If we examine, as we do in Figure 5, how currencies have performed since 17th January – arguably when the coronavirus started to materially impact other financial markets – a number of points stand out:

  1. It is still not clear-cut that Asia-Pacific currencies have underperformed other major currencies.
  2. Asian currencies – bar the Philippines Peso, Thai Baht and Japanese Yen – performed more weakly versus the US Dollar then in the first half of January, along with many other developed and emerging market currencies, including currencies of oil exporting nations (Norwegian Krone, Canadian Dollar and Russian Rouble).
  3. The corollary of course is that the US Dollar NEER, which had only appreciated incrementally in the first half of January (+0.2%), has since rallied 0.8%, according to our estimates.
  4. The Australian and New Zealand Dollars, South African Rand and Brazilian Real have depreciated less since 17th January than they did between end-year and 17th
  5. While it is perhaps unsurprising that the safe-haven Yen has been the best performer in the past eleven days, it is notable that the Swiss Franc has actually weakened slightly versus the Dollar.


Asian currencies showing some viral resistance 12


SARS provides a template of how major currencies may perform in coming months

At first glance it may appear surprising that Asia-Pacific currencies have not all posted significant losses. However, they held up reasonably well overall between November 2002 (when the SARS virus was first identified) and June 2003 (when the SARS virus was effectively declared as contained).

The Chinese Renminbi depreciated nearly 5% in NEER terms (using the November 2002 and June 2003 average monthly NEERs) but still outperformed the US Dollar (-6.4%) – see Figure 6. Most other Asian currencies only weakened between 1.8% and 4.2%, with the Thai Baht NEER broadly unchanged. The Indonesian Rupiah, New Zealand Dollar and Australian NEERs appreciated, respectively, 5.5%, 8.2% and 12.0%. The Brazilian Real, Argentine Peso and South African – high-yielding emerging market currencies – and the Canadian Dollar were the four best performing currencies over that period. The safe-haven Swiss Franc was broadly unchanged.


Asian currencies showing some viral resistance 13


The resilience of Asia-Pacific currencies, and more generally emerging market currencies, in the face of the deadly SARS virus should be seen, in our view, in the context of rising global risk appetite. Indeed, November 2002 marked the beginning of a five-year US equity market bull run which only ended in late 2007 with the ensuing great financial crisis.

Equity bulls would argue that the rally in US equities, which is now entering its 12th year, and buoyant global risk appetite has at least until now partly insulated Asia-Pacific currencies from the full impact of the novel coronavirus outbreak. We think there are other factors at play.

For starters, Chinese authorities have arguably responded more quickly to this latest viral outbreak than they did with SARS over 17 years ago and international cooperation has been swifter and better coordinated. So far only 2.5% of reported cases of the novel coronavirus have resulted in a death versus nearly 10% during the six-month SARS virus although this ratio may of course rise given the virus’ incubation period.

Moreover, Asian central banks have since become far more adept at managing their currencies, intervening in the FX market to smooth out fluctuations in their currencies. The fact that in 2019 the Indonesia Rupiah and Indian Rupee, historically very volatile currencies, traded in ranges of only about 5% versus the US Dollar is a point in hand.

Finally, global GDP growth seemingly stabilised in Q4 2019 – albeit at a modest 3.0% yoy – which at the margin will be supportive of economic growth in open economies (such as Malaysia) and their currencies (see Early Christmas for (still weak) global growth, 11 December 2019).


Asian currencies showing some viral resistance 14


Global FX volatility’s remarkable disappearing act despite confluence of risks

More broadly, global FX volatility has remained extremely subdued both in absolute and relative terms. Our measure of global FX volatility spiked on 9th January to a 13-week high, in line with our view that “the risk is that global FX volatility will rise in coming weeks” (see Depressed FX volatility allows for few surprises, 22 November 2019).

However, we estimate that realised volatility in a turnover-weighted basket of 32 major currency pairs against the Dollar – measured by the 10-day standard deviation in the daily percentage change in the spot (closing) price – has since fallen from 0.38 three weeks ago to 0.24 and is only half its 10-year average of about 0.47 (see Figure 7).

This is rather remarkable given the events of the past month, including:

  • Wildfires in Australia which intensified from November 2019 onwards;
  • The outbreak and acceleration in the spread of the coronavirus in China and internationally;
  • The escalation in tensions between the US and Iran in the wake of a deadly US air strike in Iraq on Iran’s military commander, General Qasem Soleimani on 2nd January;
  • The signing of a US-China Phase One trade deal (15th January);
  • The start of US President Trump’s impeachment trial on 16th January;
  • Central bank policy decisions in India, Mexico and South Africa going against consensus forecasts (Bank Negara Malaysia and the South African Reserve Bank cut rates 25bp in January 2020 versus strong consensus forecasts of no cut while the Reserve Bank of India left rates on hold in December versus a 25bp rate cut consensus forecast); and
  • Market pricing for Bank of England rate cuts also rising significantly since 9th


The question, which we posed in Lack of US market & macro volatility both reassuring and troubling (17 January 2019) and Depressed FX volatility allows for few surprises (22 November 2019), remains what – if anything – can materially disrupt what have so far been reasonably benign currency markets. Equity bears would argue that stocks are ripe for a significant correction and that the coronavirus outbreak – if not quickly contained – could be the straw that breaks the camel’s back.

In this scenario we would expect Asia-Pacific and emerging market currencies to come under greater pressure. However, we would again point to Asian central banks’ ability and willingness to intervene in FX markets to stabilise their currencies and to the limited contagion (to other currencies and financial markets) from the recent Argentine Peso and Turkish Lira crises.

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