Forex News Roundup For May, 20 2020

Our Forex News Roundup tells you everything you need to know about the global currency market's happenings over the past few days. As has been typical of the past few months, there's plenty to talk about, with the Covid-19 pandemic continuing to impact the Forex market and other political and economic factors also influencing prices and volumes.

Increased Currency-Equities Correlation

Since the coronavirus-induced stock market crash in March, G10 currencies (with the exception of the US Dollar) have been correlating strongly with major US stock indices, such as the S&P 500 and the Nasdaq. This was evident once again earlier this week after Germany and France tabled a proposal to set up an EU recovery fund to help the bloc deal with and recover from the pandemic.

Following this proposal, major G10 currencies, such as the Euro (EUR) and the British Pound (GBP), appreciated sharply against the US Dollar (USD). Currency analysts believe this strong correlation will continue so long as there is global economic uncertainty due to Covid-19, particularly in the US, which has by far the greatest number of coronavirus cases of any country, with over 1.5 million confirmed cases and about 93,000 related deaths.

EM Currencies Suffer COVID Hit

While the equity and bond market crashes have dominated the headlines, one of the biggest other victims of the pandemic is Emerging Market (EM) currencies. Since the pandemic escalated earlier this year, many EM currencies, including the Mexican Peso and the South African Rand, have recorded historic lows against the US Dollar and many have continued to depreciate this week.

EM currencies are being hit hard because most investors are moving away from risky assets amid the pandemic, so they have been dumping their holdings of such assets, which include EM currencies. Furthermore, as these markets are quite illiquid (especially when compared to major, hard currencies), even relatively small sell orders can exert profound downward pressure on prices.

It is difficult to predict whether or not EM currencies will quickly recover following the pandemic or at least once its worldwide peak is over as some investors may remain quite risk-averse, while others may be feeling very opportunistic and be looking to aggressively capitalize on opportunities to make back some of their lost capital post-COVID.

US Dollar & Japanese Yen Poised For Rebound?

The US Dollar and Japanese Yen (JPY) have both depreciated this week at the expense of other major currency pairs. Still, a rebound could be on the horizon, according to Ilya Spivak, Head Strategist of the APC region at DailyFX.

He noted that a recent report by the US Treasury Department showed that less than 10 percent of the $500 billion earmarked to help businesses deal with the pandemic had been processed and deployed, and said this "bodes ill for the pace of economic recovery."

But, he said this could lead to a rebound for the Japanese Yen and the USD:

"That might see the US Dollar and Yen reclaim lost ground while cyclical commodity-linked currencies succumb to outsized selling pressure."

A Quick Summary

Since the Covid-19 pandemic wiped trillions of dollars off of indices across the globe, G10 currencies (aside from the US Dollar) have been trending more closely with American stock prices.
Emerging Market currencies have been severely affected by the pandemic, as investors shift their capital to safer assets or opt to hold their cash as they look to prevent further losses to their portfolios.
This sell-off of EM currencies has caused some to fall to historic lows against the US Dollar.
The US Dollar and Japanese Yen could partially recover after suffering significant losses in recent days, according to an FX analyst.