One unexpected factor affecting the currency markets this year so far is the sudden outbreak of coronavirus. The initial outbreak in the Wuhan province of China was enough to send the Chinese yuan (CNY) into free fall, and this has quickly spread to neighbouring South East Asian markets.
The Japanese yen (JPY) quickly followed on news of cases of the illness, and Thai baht (THB) has also succumbed to a sharp drop. Most surprisingly, the Australian dollar (AUD) has dropped 4.3 percent against the USD; despite having a relatively strong economic outlook, the Australian currency seems to have become an unexpected barometer for fears overcoronavirus.
This may seem a strange development, but it needs to be viewed in the context of the developing outbreak; China is Australia’s largest trading partner, and what weakens the Chinese economy also affects Australia. Thailand is alsoheavily reliant on tourism as a source of economic growth, and Chinese tourists accounts for a quarter of visitors.
This means that the coronavirus outbreak is causing a ripple effect on world economies—as each country develops coronavirus cases, its economy loses ground.
While this is happening, countries with existing outbreaks develop more stringent movement and quarantine controls, leading to a return to economic stability.
The result here is a see-saw effect between currency pairs. By the time news of new outbreaks or successful containment of the disease become known to traders, the currency has already moved. Only sophisticated institutional traders with inside knowledge of currency markets can really benefit.
For retail traders, there is no way to know how to approach trading off the back of new developments. While ethics might not be a primary concern for some traders, attempting to profit from a global pandemic with a high mortality rate is an extremely questionable method of trading based on equally questionable logic.
There are around 43,000 global cases of the virus, but only 1,100 deaths so far. Most of the cases are near the epicentre in Wuhan; 80 percent of these deaths have been elderly people, and 75 percent of deaths involved people with pre-existing serious health conditions. This is nonetheless tragic, but it appears that even in the epicentre, health authorities are able to contain the spread.
Furthermore, China has made good progress in using retroviral drugs to reduce mortality, and the UK may well have a vaccine in 18 months. The fears over coronavirus are probably overstated, so forex traders should focus on benefiting from the cure not the disease. Choosing a currency pair that has been affected over the last month by the coronavirus is possibly the source of a good long-term investment.
China may have been caught unawares initially, but their subsequent response has set a gold standard for treatment, and the technology already exists to prevent a pandemic in developed countries. Betting on the worst-case scenario is both unethical and stupid, and placing an investment on a cure for coronavirus is more likely to pay dividends over the next 18 months.