News & analysis

The dollar’s bull run accelerated last week, as official data indicated the coronavirus outbreak in China was beginning to slow, but regional outbreaks in South Korea and Japan worsened, and investor risk appetite once again deteriorated.

With Japan’s economy already in contraction in Q4 due to last year’s sales tax hike, the yen enjoyed no safe haven demand and weakened more than 2% against the US dollar.

With US data continuing to surprise to the upside, the dollar was once again left as the best option for investors seeking safety and saw a broad wave of strength.

After manufacturing survey data from the New York and Philadelphia Federal Reserve Banks printed well above expectations last week, US economic surprise indices are now solidly positive, further supporting the dollar as the safe haven of choice.

Conference Board consumer confidence figures on Tuesday 25th and durable goods orders on Thursday 27th offer further tests for US data this week. Meanwhile, updated official Chinese purchasing managers indices will be released early morning on Saturday 29th, followed by the release of Caixin Manufacturing PMI early morning on Monday 2nd March.


Chart: The US dollar dominates major currencies
Spot Returns (%)


The coronavirus is widely expected to reduce global growth in Q1, but the severity of this risk will vary widely among regions and different economies – creating a high potential for further FX volatility.

A broad consensus among forecasters is that the outbreak itself will peak and be contained in Q1, creating a negative shock to growth but allowing for recovery from Q2 or Q3 onwards.

This base case assumption is shared by a wide variety of forecasters, including private sector banks such as Goldman Sachs, independent forecasters such as Pantheon Macroeconomics, and central banks such as the Reserve Bank of Australia and the Reserve Bank of New Zealand.

The size and distribution of this shock remains unknown, however, and last week’s worsening outbreaks in Japan and South Korea prompted local currencies to sell off sharply as global markets grappled with this uncertainty.

The selloff in JPY, when coupled with euro weakness, put broad measures of dollar strength such as DXY and the Bloomberg dollar index at multi-year highs.

Japan and South Korea outbreak highlights regional risks


Even assuming Q1 containment of the outbreak in China, the disruption to global supply chains and demand is likely to be significant.

The shock is likely to be far more significant for open economies with close links to China. Japan and South Korea fit these criteria, given that exports to China represent around 4% and 13% of GDP respectively, and are both dealing with escalating domestic outbreaks which threaten to compound the negative effects of lower external demand from China.

The coronavirus outbreak in both countries worsened significantly last week, with cases in South Korea more than doubling over the course of the week.

Of the 100 new cases reported on Friday, most were from a single cluster related to a religious sect in the city of Daegu, which along with Cheongdo has now been declared a “special care zone” where citizens have been subject to confinement.

Daegu is the fourth largest city in South Korea, with a population of 2.4 million, so the containment measures will have a non-trivial impact on growth in Q1, and possibly Q2, depending on the length of the outbreak.

Case growth is lower in Japan, with only 3 new cases confirmed on Friday, but last week’s GDP data for Q4 showed a sharp 6.4% annualised contraction, highlighting the fact that the local macroeconomy may be poorly positioned for any further shocks.

Given last week’s losses for KRW and JPY, the evolution of both local outbreaks will be crucial for both these currencies this week.



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