This is how the coronavirus infects the currency market

The coronavirus is making more and more victims and creating a lot of unrest. On the foreign exchange market, especially the currencies from emerging countries have to suffer. This has everything to do with falling prices for commodities such as coffee and oil.

The corona outbreak is dominating the news flow. In doing so, the focus is shifting from the disease itself and the growing number of infections, to the impact the virus has on public life. Stores miss out on a lot of turnover because Chinese people stay indoors as much as possible.

That blow is all the harder because consumer spending has always increased significantly in the period around Chinese New Year. The central bank is pumping tens of billions of euros into the economy to prevent the growth rate from slowing down too quickly.

Why is the real crashing?
In currency markets, currencies of emerging countries have been hit particularly hard by the corona outbreak. This is partly due to the fact that many parties seek the safety of the dollar and other hard currencies. On the other hand, the indirect consequences are also felt. For example, the coffee price has fallen by 18% as major coffee chains have closed thousands of Chinese branches.

That is a setback for coffee exporter Brazil. That country also exports industrial metals, whose prices have also fallen sharply due to the slowdown in China's growth. The Brazilian real has therefore fallen by 6% against the dollar within a few weeks.

Striking: the renminbi remains out of reach
Oil countries are also falling victim to the corona virus on the foreign exchange market. China is the largest oil importer in the world. The prospect that residents in that country will take the road less often for the time being has pushed the price of oil down by about 14%.

As a result, the Russian ruble fell by 5% against the dollar in the last three weeks of January. However, the decline of the Chinese renminbi itself is not that bad compared to other emerging currencies. Against the dollar, the decline is limited to about 2%.

Small room to move
An important cause of the remarkably small decline is the very tight wiggle room that the Chinese rulers give the currency. To prevent speculators from attacking the renminbi, the currency is allowed to fluctuate only slightly against the dollar. If you want to do business in China, you can only convert large amounts to or from the renminbi with government permission.

This approach prompted the United States to label the country as a currency manipulator. As part of the trade agreement between the two countries, that accusation was withdrawn in January.

Catch up is coming
There is a good chance that the renminbi will have more and more room to move in the future. China has been trying to expand economic power on the international stage for years. That becomes a lot easier with your own independent currency. In the future, a crisis such as corona could therefore lead to sharper price movements of the renminbi.

However, the step-by-step release of this coin is a years-long process. It seems that other emerging countries will first steal the show on the foreign exchange market, once the corona outbreak has been curbed in some time.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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