Global Economic Turmoil Caused Forex Market Volatility

With the plummet of crude oil and trading curb triggered by stock market clash, the global economy is a mess, inevitably affecting the forex market; investors panicked over the stock markets plunge, and currency prices fluctuated greatly, with volatility in many currency pairs breaking records.

Investors are selling off US dollars due to the falling Treasury Bond yield. Dollar dropped to a 3-year low against Japanese yen, with the volatility rate in 3 months at the highest level since 2008. The exchange rate of USD to CHF, EUR and GBP also declined sharply.

The dollars sharp fall has turned investors towards safe havens such as yen and the Swiss frank, putting excessive pressure on Bank of Japan and Swiss National Bank. The yen is gradually reaching the largest 3-day gain since the financial crisis in 2008, up by 9.4% within 12 trading days. This is a bad news for Japanese exporters, while policymakers are equally concerned. A senior finance official noted that the government is closely monitoring the situations in trade.

The risk of a recession Japan faces after a 7% shrinkage in Q4, together with the fast-rising yen that weighs on exports, will force the central bank to take actions as the only chance.

Meanwhile, Renminbi is appreciating against the falling US dollar. According to Reuters, Renminbi has risen over 1,000 pips against US dollar in the last 15 days due to capital inflow driven by the single-sided adjustments of USDX and Treasury Bond yielding rates, nearly recovering the loss caused by February‘s coronavirus outbreak in China. The yuan’s rising trend is expected to last until USDX stabilizes.

Analysts pointed out that the spread between US dollar and yuan may be crucial for the appeal of Renminbi assets, but given the relatively low weight of the currency in USDX, it may not be an ideal safe haven currency.

Renminbi is expected to remain steady for the moment due to effective containment of the outbreak and expected monetary policies in China and US, but investors should remain cautiously optimistic over the yuan in the longer term.

On the other hand, in light of the pandemic‘s impact on China and the global industrial chain, a strong effective exchange rate of Renminbi is clearly unfavourable for the recovery of China’s foreign trade, not to mention the fix quota of import from the US. Its estimated that market will push down CNY/USD to boost economic recovery.

Right now global investors are waiting for the next move of Washington, with their eyes fixed on the fiscal stimulus the US government will implement to curb further slump of the stock market.

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