Corona virus Lock-down and its Implications on the Forex Market

Corona virus Lock-down and its Implications on the Forex Market

10 Apr 2020 06:12 PM

The saga of the un-treatable virus which started in December last year in China has created a wave across the globe with its vast spread across the age groups and fatalities making it a pandemic. The China virus or the Covid 19 has caught the global systems unprepared with basic personal protective gears and ventilators. This coupled with non-adherence to social distancing and not staying at home in many countries at the required time has made the spread double in a week now.

So was India’s decision on locking down the country for 21 days required? The implication on the economic growth or rather slowdown has only made many doubt the timing and preparedness of the decision. From mass exodus of the un-organized labour to their homes in countryside made the transmission from the urban areas to rural regions faster. With less covid tests being conducted in remote areas, are we sitting on a lower infected number? Hopefully the symptoms should be out sooner than later to give a clearer picture of this.

The organized sector like IT companies or the financial markets have managed to stay tuned while working from home. But the non-essential commodities manufacturing units, real estate construction companies, automobile and logistics sector, entertainment and food industry has taken a hit and uncertainty on whether the unorganized labour will return or not has only made things worse.

Financial markets giving the pulse of the economy has managed to stay afloat with enough support from the country’s central bank and the respective market authorities. Temporary relaxing rules and reduced market hours for quoting forex rates from Foreign Exchange Dealers’ Association of India (FEDAI), thought after rate cut by Reserve Bank of India (RBI) to ensure that the liquidity in the system is maintained has helped the ever falling markets to take a few breaths though it may depend more on the number of new cases in days to come.

RBI had to finally support the falling rupee by intervening in the forex markets through sale of dollars which can be implied as the country’s forex reserves plunged the most in eight years by USD 5.35 billion to USD 481.9 billion in week ending March 13. And again upon touching the record low levels for Rupee inspite of the shortened trading hours, RBI has been supporting the rupee periodically.

Most currencies and commodities have seen the high volatility in their prices. Crude oil prices fell from a high of USD 65.65 per barrel (seen in the beginning of the year) to low of 19.27 on March 30 with gold moving from USD 1702 per ounce on March 9 to 1451 on March 16 and hoping to close the week on a high. Most currencies saw huge volatility making them go deeper in the recessionary phase. The job losses and increasing unemployment rates will only make it tougher for the economies to revive past this phase.

Central banks across the globe have sought to add stimulus to their falling financial systems. From giving money directly in citizen’s account to providing trillion in loans to support the economy, US Federal Reserve is doing its bit. European Central bank has announced monetary stimulus measures to calm the markets by buying billions of Euros worth of securities and bonds. Bank of England cut interest rate back to back to an all time low of 0.1% along with a GBP 200 billion money creation scheme. Even Japan declared a state of emergency with a nearly USD 1 trillion stimulus package.

Foreign exchange market reacted to these stimuli and dollar was seen inching higher against most currencies. The dollar index reached towards a high of 103 (levels last seen in early 2017). Euro and Yen fell against the greenback inspite of the easing policies.

During such uncertain times, one should have foreign exchange risk policies in place especially while handling corporate finance. Risk policies when formulated at the beginning aid in complying with the stop losses and monitoring them periodically. Foreign exchange risk advisors add value to the forex portfolio whether it is an exporter or an importer. Importers have to ensure protect their cost of procuring the product or service while an exporter should have the benchmarks in place in order to protect the same. It pays to stay abreast of the market conditions in order to take appropriate actions when the markets enter an unchartered territory as the current times.

In the hope that markets get back to neutral levels sooner than later and the virus is contained at the earliest, we hope you stay safe without venturing outdoors much.

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