Swiss Franc and Yen Feel the Heat as Coronavirus Fears Fade Amongst Investors

- Coronavirus infection rate appears to be slowing
- Markets looking forward to a recovery
- CHF and JPY are down as markets hunt risk

Image © Adobe Images

The safe-haven currencies of the Swiss Franc and Japanese Yen are two of the major under performers on global markets on Tuesday as fears over the coronavirus outbreak fade.

European stock exchanges are showing gains of over 1.0%, while those currencies that tend to benefit in times of market stress - as was the case last week when coronavirus infections were rising - have started to see outflows push their purchasing power lower.

The Pound-to-Yen exchange rate is up 0.50% amidst a broad-based Yen selloff, with the pair now quoted at 1.41.88. The USD/JPY exchange rate is at 109.65, up 0.42%. The Pound-to-Franc exchange rate is half a percent higher at 1.2610 while USD/CHF is up 0.31% at 0.9686.

The market's reaction suggests investors are looking ahead to a turning point in the coronavirus outbreak and are ultimately expecting a v-shaped recovery in the Chinese economy. A v-shaped recovery suggests any recovery will be rapid and the slowdown won't linger, therefore the absolute economic risks posed by the disease is likely to be minimal.

There are early signs that the diseases is coming under control, with the rate of new infections steadying.

As of February 04, there are 20659 confirmed cases of the infection, with 427 deaths and 680 recoveries.

The cumulative number of coronavirus cases as of January 04 shows the curve is flattening. Image and data courtesy of Johns Hopkins University CSSE

"Although the number of infected continues to grow day by day, the percentage increase is coming down. This suggests to us that the contagion rate has come down, hence the drastic measures taken by the Chinese authorities are starting to work," says Allan von Mehren, Chief Analyst at Danske Bank. "While there is uncertainty about the true number of infected in Hubei province, the same trend of a slowing growth rate is evident outside Hubei. Notably, the number of cases outside mainland China seems to be levelling off."

von Mehren says another positive development is that the death rate is so far very low outside Hubei province. Only 13 people have died outside the province giving a death rate of 0.2%. The death rate of normal flu in the US is 0.13%. In Hubei province, 414 people have died leading to a death rate of 3.1%.

Above image courtesy of Danske Bank.

There is also an expectation that the outbreak could see the U.S. allow China extra time to implement the phase 1 trade deal, which is on margin a positive in the market's eyes.

"China have also agreed to let U.S. experts in to assist, despite last week accusing Washington of fuelling hysteria after evacuations and flight restrictions. China might well be lobbying the US for some slack when it comes to keeping up with the trade quotas that were signed off in phase one of the trade deal last month. The numbers were ambitious in a buoyant economy, but with what's on the cards for the Chinese economy they could be too much to meet," says Mark Palmer, an analyst at Hamilton Court FX.

Any delay to implementation would be permissible in the event of an "unforeseen event." However there appears to be no sign yet of movement from U.S. authorities on the matter, and it is unclear whether China have even lodged a formal request on the matter.

We believe that unless the infection rate starts to climb once more, markets will continue to look forward to the ultimate containment of the disease and an ensuing recovery in the Chinese economy.

"Unless the situation further escalates, expect investors to hunt for bargains at these lower prices for riskier assets. Market sentiment could quite quickly turn positive and turn this market upside down," says George Vessey, Currency Strategist at Western Union.

Those currencies most exposed to the virus belong to those countries that are heavily reliant on China for trade. The below graphic, courtesy of BNY Mellon shows Australia is particularly exposed and will go some way in explaining the Australian Dollar's declines since the outbreak:

However, note too that Japan and Switzerland have sizeable trade exposure to China, which begs questions of the suitability of the Yen and Franc as safe haven destinations in times of coronavirus-triggered market anxiety.

The findings by BNY Mellon is that ultimately it is the U.S. Dollar which is the best safe haven bet, as U.S. trade exposure to the region is relatively limited in terms of % of GDP.

Research by Asia-focussed DBS Bank suggests the shock to China’s economy from the coronavirus will likely be 2 to 3 times larger than SARS in 2003.

DBS say growth may fall to 4.7% in 1Q before recovering to 5% in 2Q and they are lowering China’s full-year growth forecast to 5.3% (from 5.8%).

However, Chinese authorities are being tipped to rely on fiscal and monetary policy easing to cushion the economy. At the weekend the Peoples' Bank of China (PBOC) made the decision to inject 1.2 trillion yuan (£130 billion) of cash into the financial system via reverse-repurchase operations in a bid to ease any 'liquidity' or cash shortages.

While the full negative impact to Chinese growth might still be some weeks away, it must be stressed that it is the nature of the recovery that markets are primarily interested in.

"A typical pandemic can also pave the way for a V-shaped recovery for both the economy and the markets," says Chris Leung, Economist at DBS, but Leung warns, "keeping liquidity ample and ensuring regular functioning of the
financial system are now the chief priorities."

If the coronavirus outbreak fades as a threat, expect those currencies, commodities and stocks exposed to China to make a notable recovery.

"We think the market is reacting to nervousness around the coronavirus and concerns about its impact on the Chinese economy. While this global health worry is far from over, currently our expectation is that the economic fallout will be without significant long-lasting effects on the global economy," says David Absolon, Investment Director at Heartwood Investment Management. "Noise surrounding the coronavirus may have led investors to return to the relative safety of bonds of late, but we don’t expect this to be a sustained trend."

The Australian Dollar's rebound this week, contrasted to the decline in the Yen and Franc, is testament to how the market will likely react if coronavirus fears evaporate further.