As we decided to include the possibility of this in our ‘Five Looming Dilemmas for 2020’ series, I hadn’t thought that by the time we came to produce the article we would be right in the middle of the event! Many of you will be under local lockdown, or back to working-from-home due on the latest government advice.
One of my favourite authors, Adam Kay (best known for the book This is Going to Hurt), summarised it quite well in a recent tweet. Adam said, “I can’t believe the government’s plan of keeping cases down by telling us to go back to work and eat at restaurants as much as possible hasn’t worked.” I feel as though the UK response has appeared muddled at times.
History and understanding
For those who have been living in a cave, or recently arrived in 2020 via time machine, Covid-19 is a strain of Coronavirus that originated in China in 2019. Its highly contagious nature has resulted in a rapid spread throughout the globe and current statistics show it has infected over 38m people, with an excess of 1m deaths.
The effect on consumers and world markets was initially one of panic, with toilet roll less prevalent than diamonds for the first time in recorded history, as supermarket shelves were stripped bare. Stock markets initially tumbled, with the FTSE100 dropping from around 7,400 in February to a low of around 5,000 in March, a near 39% drop. We currently sit around 5900, still 22.5% down on pre-Covid levels.
Currency markets experienced similar volatility, also taking into consideration that Sterling has other factors weighing on it such as Brexit, we saw a huge slump in the value of the Pound. On the 9th of March GBPUSD interbank rates were trading near 1.3100, with the rate 10 days later reaching a low of 1.1450, a 13.5% drop. GBPEUR saw a similar drop, dropping from 1.2000 in February to 1.0800 on the 16th of March, a 10.5% drop.
Where to from here?
Determining what’s next is a near impossibility, as although we are starting to see higher infection rates than at the beginning of the outbreak, testing is at a much higher level, so the actual figure is comparably lower as a percentage of the population.
The initial reason for lockdown was to stop the collapse of the NHS and with current hospital admission rates showing around 1200
As the government announced new lockdown style measures and rules to keep us from spreading the virus, you would imagine this will bring the number of new cases down. That said, many scientists are suggesting that we may need to live with this virus for a long time and/or until a vaccine is created.
Either way, this is bad for business and UK PLC, as the recent effects will lead to higher unemployment, less tax revenue and greater borrowing required by the UK government.
A priority during this period of local lockdowns is ensuring that businesses have access to cash to plug the short-term cashflow gaps. For many businesses, the early offering of accessible and cost-effective finance proved attractive, such as the Coronavirus Business Interruption Loan Scheme (CBILS). These loans were launched almost 8 months ago and with a view that the economy might be returning to some semblance of normality by October, which it’s not.
The key scheme for many companies was the Coronavirus Job Retention Scheme, commonly referred to as furlough, where employees are paid up to 80% of their wages: 20% from the employer and 60% from the government up to a maximum of £2500 a month. This ensured businesses were not haemorrhaging working capital on employees that cannot work and helped maintain employment levels.
However, as furlough concludes at the end of October, from November 1st a new scheme will be put in place, namely the Job Support Scheme. The new scheme is intended to curb redundancies over the winter months, now employers can keep more employees on a part-time basis with government contributing wages alongside a “retention bonus” which pay employers to bring staff off furlough. As part of this new scheme, the government will pay 67% of wages up to a maximum of £2100 a month for each employee. To be eligible, staff must be working one-fifth of their normal hours. It is also available for part-time employees who will have to be working for at least a third of their hours to qualify for support.
Since employers will still have to pay their workers’ national insurance and pension contributions if they are forced to close, each business will receive a grant of up to £3000 a month. This is more generous than the current Furlough scheme where only shuttered firms receive £1500 every three weeks.
Looking forward, whilst the additional national borrowing might be seen as worrisome (by 20th September, employers made £39.3bn of furlough claims which cost the government £60bn in total), extending furlough could be a cheaper alternative to the state needing to support a country with a 10-15% unemployment rate, according to Garry Young, Deputy Director of NIESR. Additionally, if more businesses survive throughout this period, likely, the economic recovery will more be pronounced, when it comes.
So how are countries responding to the virus?
Many argue that it would be inaccurate to describe the current US situation as a ‘second-wave’, considering that the first wave never truly ended. Many critics concur that the US never truly controlled the spread of the virus and criticise how they were slow to put in place measures to hinder the spread of infection. With over 7.6million cases and over 213,000 deaths already, there appears to be no sign of rates slowing.
The White House has recently declared its reliance on herd immunity, in which the virus should be allowed to spread amongst the healthy young, and the priority of protection should fall on the elderly and vulnerable. Many scientists condemn this attitude, of relying on herd immunity rather than a vaccine, as foolhardy and unrealistic. They note that about 85% to 90% of the American population is still susceptive to COVID-19 thus encouraging so many people’s exposure to the virus would cause an exponential increase in deaths. Expert scientists also warn that herd immunity is not possible with only 10-20% of the population being infected.
Other countries reacted differently, notably South Korea who has only had 24,805 cases and 434 deaths. Their advanced contact tracing system called EISS identifies positive individuals and through pulling their smartphone data, credit card usage and travel routes, within 4-12 hours up to 100 close contacts of the positive individual and notified and tested. Statistics show that in the UK, each positive case leads to fewer than two contacts being reached. An incomparable difference.
Irrespective of methods of tracking and testing, European countries are facing their highest-ever Coronavirus numbers. In the second week of October, Europe reported more than 700,000 new coronavirus cases. This surge in numbers has forced governments to respond accordingly. Macron had announced a curfew in Paris from 9 pm – 6 am and a hefty fine if violated, which has now turned into a full lockdown The Czech Republic has closed schools, restaurants and bars as of 7th October. The country is also “cancelling nonessential medicate procedures to maximise hospital capacity”, Esme Nicholson reports.
The three-tier alert system adopted in the UK categorises each region under certain restrictions. This demonstrates an attempt to avoid repeating a national lockdown. Different parts of the country have been split up into “Medium”, “High” or “Very High” local coronavirus alert areas under the new system, all with individualised restrictions. Areas already in Tier 3 include Lancashire, Manchester and Liverpool. South Yorkshire will move into tier 3 from Saturday. London moved to Tier 2 from last Friday night. The Tier System is an attempt to avoid a full lock-down or circuit breaker. Northern Ireland has introduced a month-long lockdown and the Welsh Government has implied that it will announce a circuit breaker over the school half term.
So what? What does this mean for FX?
Due to the impact of the pandemic, data releases, such as GDP, inflation and unemployment, may have less of an impact on currency markets when compared to more normal, stable times.
A Covid-19 vaccine would likely be positive for world markets, but there may also be gains for the currency of the manufacturer, as it might only be offered to their population first, should they have control of the vaccine.
At the same time as reports of a second lockdown in the UK, Brexit uncertainties continue to weigh on Sterling. With the US election next week, this could also rock the markets.
Read our other articles in this series:
- A Double Dip Recession or V Shape Recovery – How Will Sterling Be Affected?
- Brexit UK-EU Trade Talks: How will sterling be affected?
- Do US Presidential Elections Affect the Dollar?
- Racing Towards The Final Furlough
Are you comfortable with a variation in FX cost?
Does your corporate FX hedging policy stand up through the volatility? We review the purpose of foreign exchange hedging while posing 4 questions to assist you in rethinking your currency policy under Brexit and COVID conditions. Download our hedging report here: https://bit.ly/32a7rL0
Infinity Insights Subscription
Whether you plan to exchange currency just once or many times in the future, there’s a lot to gain from getting to know the markets. We write regular currency updates that focus on the very latest factors influencing exchange rates. Simply fill in your details below and you will receive Infinity insights in your inbox.
This blog post is intended to provide you with information on the services Infinity International Limited (IIFX) offer and should not be interpreted as advice or as a solicitation to offer to buy or sell any currency or as a recommendation to trade. Foreign exchange rates provided therein are for indicative purposes only and are not intended to give an accurate reflection of current currency exchange rates or to predict future movements in currency exchange rates. IIFX is a company registered in England with registered number 06333730 and registered address at Building One, Chalfont Park, Gerrard’s Cross, Buckinghamshire, SL9 0BG, United Kingdom. IIFX is authorised by the Financial Conduct Authority under the Payment Service Regulations 2017 (FRN: 567835) for the provision of payment services. IIFX is authorised and regulated by the Financial Conduct Authority in the conduct of designated investment business (FRN: 671108).