How Will Coronavirus Impact FX Markets?

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Deadly Virus Confirmed

News of the outbreak of a deadly disease in Asia, called the “coronavirus” has been grabbing headlines this week.

The disease, which worryingly belongs to the same family of viruses as SARS, broke out in China over the last week. So far, 9 people have been killed by the virus. And a further 453 are receiving treatment for infection.

Initially, the spread of the disease had been limited to Asia. However, as of today, one confirmed case has been reported in the US. Experts warn that the virus is quickly mutating and spreading between humans.

This is particularly concerning due to the busy Chinese New Year season which sees millions of Chinese people traveling around the globe.

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Market Impact

So far, the market impact from the news of the outbreak of the virus has been relatively limited.

Asian equities have been a little softer this week and commodities have seen some downside pressure. However, if the contagion worsens as experts warn it likely will, the economic impact will start to become more prevalent.

Echoes of SARs

The outbreak of the SARS virus in 2003 was responsible for the death of around 800 people worldwide. Despite a mortality rate of just 10%, it sparked enough fear and uncertainty that Hong Kong was dragged into a recession.

China, too, suffered a significant slowdown as a result of the viral outbreak.

Fears For Chinese Economy

Given the fragile state of the Chinese economy on the back of the two-year-long trade war with the US, there are fears that the country will not be able to handle the economic impact of such an outbreak.

Consequently, if the outbreak worsens, we are likely to see the PBoC easing further to help backstop the economy. A further outbreak will also likely make its weight known on the economies of many Asian emerging market economies. These, again, have also been struggling recently as a result of the downturn in global growth.

Waiting Game

For now, it remains a waiting game. However, if the situation worsens and the mortality rate increases, then we should see further slippage in equities prices as risk-off trading takes hold.

This theme should also see increased safe-haven support for assets such as gold and the Japanese yen. CNH is likely to weaken further against USD as expectations and delivery of further PBoC action weigh on the yuan.

Regarding the depth and duration of market impact, the key driver will be the severity of the outbreak. If governments are able to stop it before it reaches a SARS-type contagion level, the markets might be able to avoid the more extreme negative impact.

Technical Perspective

USDCNH

Following the breakdown through the rising trend line from 2018 lows, USDCNH stalled just ahead of the next key support level at the 6.8317 zone. It is now retesting the broken 6.9057 level from below. If price makes it back above here, focus will be on a test of the 6.9391 level next, ahead of a retest of the broken bearish trend line. For now, bias remains for further downside unless this correction starts to gain traction above the aforementioned levels.

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