13/03/2020

How is coronavirus impacting cross-border businesses and markets?


The World Health Organisation has labelled the coronavirus outbreak a global pandemic, following its rapid spread from China to multiple countries around the world. The problem for currency markets is its infecting economies as quickly as people. Symptoms include everything from disappointing data showing its strangling supply chains and disrupting manufacturing to emergency monetary policy measures from central banks.

Currencies are notoriously sensitive to dips in business and consumer activity. Mounting evidence that the outbreak is stifling global trade and economic growth has, therefore, heightened market volatility. So, what does this mean for cross-border businesses with international payment requirements?

Coronavirus impact on the pound

It has been a case of out of the frying pan into the fire for the pound. No sooner had Brexit finally happened, following more than three and a half years of crippling uncertainty, the true extent of the coronavirus diagnosis began to come clear for the global economy.

The escalation of the situation in the UK has shown that the virus is just as economically contagious as it is medically contagious. As reported cases within its borders have risen, so have fears that the crisis is suffocating domestic economic activity. This led Bank of England (BoE) officials to reassure the nation that it would implement necessary measures to support the economy once it had enough evidence of the economic impact.

By 11th March, the central bank had seen enough, including disruptions to the manufacturing and powerhouse services sectors. This forced it to slash interest rates in an emergency move, sending the pound lower. The BoE’s monetary policy committee voted unanimously to cut the cost of borrowing at its first unscheduled meeting since the financial crisis in 2008, as part of a coordinated package of measures designed to dovetail with the Budget.

Later the same day the Chancellor, Rishi Sunak delivered his highly anticipated budget statement. Dubbed ‘the coronavirus Budget’, the contents of Mr Sunak’s famous red briefcase provided a fiscal boost to the tune of £30 billion in tax breaks and additional spending. While this gave the pound some short-term support, speculation that the BoE could cut rates further at its next scheduled meeting on 26th March has cast a shadow over the currency.

Looking further ahead, it appears that the pound will remain volatile. The rate cut came as official GDP figures showed that UK economic growth flat lined in January before the virus spread to the UK, fuelling concerns that the economy is in a weak position heading into the worst phase of the outbreak.

Coronavirus impact on the US dollar

One currency’s loss is another currency’s gain in the world of exchange rate fluctuations. In this case, it’s safe-haven currencies that have, for the most part, experienced a surge in demand due to the risk-off move the outbreak has precipitated.

As a member of this elite band of currencies that investors trust in times of uncertainty, the dollar’s safe-haven appeal gave the impression that it was immune to the coronavirus outbreak when it first emerged. However, as the severity of the situation began to unfold, it became clear that the US economy was under threat from disruptions to global supply chains.

Safe-haven currencies are considered low risk because their economies tend to be strong. So, when underwhelming data revealed that the outbreak was weighing on the world’s largest economy, expectations that the Federal Reserve would be forced to cut interest rates gathered momentum.

Dollar demand, which had already started to wane, was dealt a knockout blow by the Fed’s decision to slash interest rates in an unscheduled move on 3rd March. This is the first time it had cut rates at an emergency meeting since 2008, in order to inoculate the economy from the coronavirus amid fears of a recession.

Since then, speculation has been mounting that the central bank could be poised to implement a quick-fire rate-cutting cycle, with its next meeting of policymakers on 18th March coming into sharp focus. The US government also appears to be taking the situation seriously, after President Trump suspended all flights to the US from Europe for 30 days, now including the UK. All of which is applying significant pressure to the dollar.  

Coronavirus impact on the euro

The coronavirus outbreak is having a significant impact on the eurozone. Italy, the region’s third-largest economy, has emerged as the epicentre of the outbreak in Europe. Large swathes of the country are quarantined and businesses have been shut down.

Not only does the bloc have extensive economic links with China; its own economy was already feeling under the weather. For example, economic activity in Germany shrunk in the fourth quarter of 2019. This confirms that Europe’s powerhouse economy, which relies heavily on demand for its cars from China, was treading water even before the coronavirus outbreak hit the headlines.

Will the European Central Bank (ECB) keep in line with the BoE and Fed by announcing an unscheduled interest rate cut of its own, to cushion the economic blow from this global health crisis? The argument to act is compelling. Despite the medical and economic spread of the coronavirus in the eurozone, the euro has appreciated in value against the pound and dollar. A rate cut may be required to cap this surge in value. Plus, the ECB has vowed to use all tools available to battle the impact of the coronavirus – sound familiar?

Coronavrius – what next for cross-border businesses?

The global economy is so interlinked that a significant event in China, the world’s second-largest economy, will always filter through to other economies. Unfortunately, this trend has been compounded by the spread of the coronavirus around the world. Until the outbreak is brought under control, it will continue impacting the cost of sending money overseas for cross-border businesses due to heightened currency market volatility.

As we wait for global trade to recover, decision-makers should take proactive action. By seeking expert guidance around key events and news linked to economic performance in the face of the crisis, they will be well-placed to make informed decisions about executing their business’s international payments.

This is where forward contracts are an effective FX product for businesses with regular international payment requirements. By using a currency forward contract, businesses can secure a favourable exchange rate for up to two years. This will enable businesses of all shapes and sizes to mitigate against the coronavirus impact on markets and exchange rates, as well as forecast future payments.

For more information, speak to a RationalFX currency specialist on (+44) 020 7220 8182, email ukcorporatedealers@rationalfx.com or open an account with us and we’ll be in contact to discuss your foreign exchange requirements.


Why choose RationalFX?

Based in the heart of London’s financial district Canary Wharf, RationalFX has traded over $10billion in currencies across the globe. Take advantage of our competitive exchange rates, market expertise, suite of FX products and online payment platform when you make bank to bank transfers in over 50 currencies worldwide.

Whatever your reason for making overseas payments, we’re confident our currency specialists can save you time and money while providing peace of mind. Call our team now on: +44 20 7220 8181