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Potential COVID-19 Resurgence – What does this mean for currency markets

A slowdown in global cases of coronavirus, (COVID-19), allowed Chinese stock markets to enter the Chinese new year in a strong position, regaining pre-new year holiday levels as numbers reached a record high back in October 2020 of over USD 10 trillion. It’s also been revealed that China’s gross domestic product (GDP) for 2020 beat estimates, reaching 2.3% growth.

Whilst COVID-19 may have originated in China, newly recorded infections have been at a minimum since May 2020, with a total of just 14 new cases recorded within the country on 7th February 2021.

Whilst this appeared to placate market participants to some degree, there are growing fears that there could be a resurgence of COVID-19 across Asia following a new variant of the virus seen in Japan. January saw China impose a lockdown across 11 regions as 144 infections were experienced in one day.

COVID-19 infections in Japan also surged during January, experiencing over 700 cases in one day. Whilst these figures are considerably less than what is currently being seen across Europe and the United States, cases in Japan and China had reduced to nearly zero for large periods of 2020. With COVID-19 cases still fluctuating, the long-term economic impact of the coronavirus pandemic remains unknown.

That being said, the status of the coronavirus pandemic seems to be improving greatly as a portfolio of vaccines have now become available across the globe. The UK in particular is experiencing a successful vaccine programme, with over 15 million people receiving the first dose of the vaccine. The UK’s vaccine task force indicated that the majority of UK adults could receive both doses of the vaccine by August.

Whilst the rapid deployment of vaccines is helping to improve the UK’s economic outlook, it’s currently uncertain as to how long the vaccine will offer protection from the virus. There is the potential that the vaccine could only remain effective for nine months. If this is the case, there is concern that a resurgence of COVID-19 could appear down the line and leaves the long term future for currencies largely unknown.

japan recession

New Coronavirus variant in Japan

Whilst China’s economy currently seems to be holding steady, Japan is facing economic uncertainty as a result of a new coronavirus variant. Japan published poor Q4 GDP (Gross Domestic Product) data during the beginning of December, showing a 1.6% contraction on the quarter; much bleaker than initially forecast and worse still than the 0.4% previous growth figure. Interestingly, the Japanese yen (JPY) lost a little ground against the British pound (GBP), though it’s thought that due to the Japanese yen’s (JPY) safe haven status, that the rally could soon run out of steam.

Japan is concerned regarding the possibility of an increase in coronavirus cases as it’s discovered that 91 cases of the new coronavirus variant have been found in the Kanto area. Chief Cabinet Secretary Katsunobu Kato stated that the variant ‘may be more contagious than conventional strains, and if it continues to spread domestically, it could lead to a rapid rise in cases”.

The variant contains the E484K mutation, which has been discovered in other variants from other countries. The concern is that the variant could undermine the effectiveness of coronavirus vaccines.

In total, Japan has experienced 421,000 coronavirus cases and 7,294 deaths, whilst China’s recorded cases stand at 89,806 and 4,636 deaths.

The worsening COVID-19 situation in Japan encouraged Japanese Prime Minister Yoshihide Suga to sign off on a JPY 73.6 trillion stimulus package in December a bid to revive Japan’s economy. It’s thought that the stimulus package will provide a boost to Japan’s GDP by 0.5% during the current financial year, followed by 2.5%, and then 0.6% from 2022.

British pound rises against Euro

The British pound (GBP) has reached new highs against the euro (EUR) this week, having hit EUR 1.16, hitting an 11-month best.

George Vessey, currency strategist at Western Union said “the slower pace of the vaccine rollout in European countries has been weighing on the common currency lately. The speedy rollout in the UK, coupled with fading negative interest rate bets, has supported the pound.”

With the UK continuing to vaccinate at a rapid level, it’s forecast that the British pound to euro (EUR) exchange rate could soon reach EUR 1.20.

However, the future of the currency pairing is reliant on how soon the UK economy can reopen. With the UK still in its third national lockdown and currently no timescales of when this will be lifted, UK businesses have very much remained in the dark.

This looks to change on Monday as UK Prime Minister, Boris Johnson, will reveal his plans of how to bring the UK out of national lockdown gradually. With infection rates falling, it’s hoped that shops and restaurants could open within the next couple of months, though time will soon tell if this is possible.

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