Morning Commentary: SARS-CoV-2: What’s in a Name

Foreign Exchange - Morning Commentary
SARS-CoV-2: What’s in a Name
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Yesterday, the World Health Organization (WHO) officially named the novel coronavirus SARS-CoV-2 with the disease caused by the virus officially dubbed “COVID-19.”  At first glance, this may seem like a small change, but it actually has significance.  Per the WHO, official names that did not refer to a location, animal or group of people are needed to avoid inaccuracy (coronaviruses are a family of viruses that also cause the common cold) and stigmatizing. 

While the negative welfare impact from the SARS-CoV-2 virus continues to grow with over 45,000 confirmed cases and at least 1,115 confirmed deaths, the financial market’s response has been one of resilience, especially in the equity markets.  Given what has happened, what are some of the lessons we have learned? 

Don’t underestimate policy makers

The willingness for policy makers to act, either through policy actions or explicit communication has exceeded market expectations and goes a long ways in explaining the market’s sanguine outlook.  The PBoC’s decision to cut the reverse repo rate as well as guidance for further actions later in February garnered most of the headlines.  However, other Asian central banks also took swift action, including the Monetary Authority of Singapore taking the unusual step of issuing a public statement that it has room to ease. 

Work remains to be done

Timely and decisive actions have helped to stabilize the equity markets but the commodity and fixed income markets are painting a different picture.  Likely, markets will remain unconvinced of a full recovery until they are convinced that China is making a full recovery. 

The coronavirus outbreak argues both for and against Chinese yuan weakness

Clearly the uncertainty and disruption to businesses caused by the virus should pressure China’s currency.  However, Chinese tourism represents a key source of capital outflows and is a big part of China’s service deficit in its current account balance.  The pullback in these outflows should reduce some of the currency pressure due to weaker growth. 
  • President Xi Jinping continues to maintain that China will hit its economic growth goals despite concerns over the SARS-CoV-2 virus.  Supporting this view was data from the Chinese health commission which showed the pace of infection continuing to slow.  However, President’s Xi’s outlook runs counter to economists around the world that have cut GDP growth with the median 2020 GDP growth estimate dropping to 5.8% from 5.9%. 
  • Euroarea industrial production dropped -2.1%, missing expectations.  This decline is the steepest drop in almost 4 years and continues to support doubts around a meaningful rebound in manufacturing momentum as 2019 finished with a whimper and the start of the year has been impacted by the SARS-CoV-2 virus. 
  • Fed Chair Powell continues his congressional testimony today in the Senate.  Yesterday, Powell spoke to the House in a largely uneventful affair.
  • The Swedish Riksbank kept rates steady at 0.0% as expected.  The meeting also confirmed that rates would remain at the current level for years to come. 
  • The New Zealand dollar is one of the G10’s top performing currencies as the RBNZ kept rates steady at 1.0% as expected.  However, it was a hawkish hold with the bank forecasting no more cuts this year assuming the SARS-CoV-2 virus remains contained.
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