We are in the midst of the worst economic crisis since the Great Depression. COVID-19 sent more than 3 billion people into lockdown, millions of workers lost their jobs and countless number of businesses were forced to close permanently.
As a result, a number of countries fell into recession in the first or second quarter prompting strong responses from their respective governments. From currencies to equities, markets around the world responded with sharp losses in March, but some currencies moved sooner than others, giving investors a hint of the downturn to come.
Oceania Dollars
As the crisis began in Asia, it was no surprise to see the Australian and New Zealand dollars move first. Even before the leaders of these countries announced lockdowns, the Australian and New Zealand dollars began to fall. From January 23, the day that China imposed a lockdown in Wuhan, to the start of lockdown in U.S. states in March, the Australian dollar lost more than 3 cents.
In this time, the New Zealand dollar lost approximately 4 cents before both currencies fell much further in March. Investors were worried that these two countries, who count China as their number one trading partner, would be hit hard by reduced import demand. However, the Australian and New Zealand dollars are also risk currencies. This means they are the most sensitive to the market’s mood and barring any local factors will rally when investors feel optimistic and fall when they feel nervous.
Very quickly after countries went into lockdown mode, governments responded with major fiscal and monetary stimulus packages. Central banks cut interest rates aggressively and launched new bond buying programs. At first, these powerful measures accelerated the slide in the Australian and New Zealand dollars along with other currencies like the euro and sterling. Safe haven currencies such as the Japanese yen and Swiss franc soared as investors went into panic mode.
Signs of Recovery
The Australian and New Zealand dollars bottomed around March 19. The Japanese yen, the quintessential safe haven currency, peaked on March 9. While these currencies’ reversals can’t be attributed to investors foreshadowing a recovery (because that certainly wasn’t the sentiment in March), the acceleration of their gains in April was more a sign of a turn in China and its local economies, which was later followed by recoveries in other parts of the world.
Fast forward a few months from the start of the COVID-19 crisis, and the unprecedented lockdown of billions of people combined with monetary and stimulus measures have, in many ways, set the stage for recovery. The number of COVID-19 cases peaked enough that governments around the world felt comfortable to ease restrictions and let businesses reopen. Economic data which had fallen to depression-like levels began to recover with equities and currencies rising from their lows.
The road to a full recovery will be long, and it is still unclear whether there will be a second wave of COVID-19 infections that could plunge the world back into lockdown mode. Just as the Australian and New Zealand dollars fell before the global economic decline, many currencies also bottomed before economic data started to improve and countries started to reopen. This dynamic exists because currencies are confidence measures for economies.
That is why, as economies continue to gradually emerge from lockdown measures, the performance of these currencies should be closely watched.
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