By ForexNewsNow
Trading in China has been hit by a double whammy: the spread of a deadly pneumonia virus (which has already claimed nine lives), only made worse by the (planned) closing of the financial markets, ahead of the traditional Lunar New Year celebrations.
While the jury is still out on what that could actually mean, by Tuesday (21 January 2020), we already saw a falling yuan, as well as steep declines in the FTSE China A50 Index (registering the biggest drop in six months), reports Bloomberg.
Quoting a Shanghai trader, Bloomberg points to the fact that “people are getting nervous and cashing out”. What fuels uncertainty is the five-day trading break, which will affect the markets in China and Hong Kong (starting on Friday).
As we try to explain below, Forex trading has already taken note, leading to a global shake-up in the currency markets.
People are “discouraged” from leaving their homes, having a spill-over effect on travel and sale of consumer goods.
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This is likely to impact European luxury stocks, which are most exposed to fluctuations in the Asian market. In a separate article, Bloomberg shows that luxury holdings LVMH SE and Kering have already registered falls to the tune of 2.5% and 3.7% (respectively). But it is not those investing in Europe that should be worried.
Some are already drawing comparisons to the outbreak of SARS (Severe acute respiratory syndrome) pandemic, that hit southern China in 2002-2003. The biggest concern for FX trading is whether the virus is capable of spreading. Why? This might negatively affect the surrounding countries, whose currencies are considerably more vulnerable.
The downfall spiral is driven by speculation about how serious the virus actually is. And the official numbers, released by the Chinese authorities are not helping, says the Financial Times. Talking to epidemiologists and leading public health experts, the paper believes that they are prone to underreporting and are actually much higher in reality.
Adding to growing concerns, CNN confirmed that the virus can spread between humans, breaking news this morning (Wednesday, 22 January 2020). The virus, which originally started in the city of Wuhan, central China, has now traveled to Japan, South Korea, Taiwan, Thailand and, the United States.
Effects on Forex trading: markets are growing more risk-averse, as safer “options” gain territory.
On Tuesday (21 January 2020), analysts were pointing to “a stronger yen, a stronger Swiss franc and risk aversion is setting in across everything”, which made gains at the expense of a weaker yuan. Reuters picked up on 0.54% rise by US dollar against offshore yuan (standing at 6.904 per dollar).
What is more, FX traders should “exercise caution” in making transactions in currencies, linked to Chinese trade and tourism. As discussed, this is likely to have a negative effect on markets in South-East Asia. Taking another example, Reuters points to the Australian dollar, which “touched its lowest in over a month” (standing at 0.6842 against the US dollar).
By ForexNewsNow