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Coronavirus Black Swan Infects China’s Yuan To Start Week

"Risk aversion is contagious".

Over the weekend, I suggested the yuan might get sick if the Wuhan virus continued to proliferate, stoking fears of a pandemic.

The Chinese currency had, of course, appreciated sharply against the dollar as trade tensions between Washington and Beijing thawed, and as China’s economy showed more signs of stabilization.

Potentially, the virus scare could put some of the economic gains in jeopardy. The Lunar New Year holiday has been extended, and on Monday, the offshore yuan sank to the weakest since December. Implied vol. rose.

This isn’t the best news. Word is, China’s markets won’t reopen until February 3 – that could further spook traders. Over the weekend, at least one strategy suggested 7.00 would be a ceiling, but as Monday’s action shows, all it’s going to take for the yuan to slide back through that psychologically-important level is a few more unfavorable virus headlines.

Monday’s move was the largest since December 13, when the details of the “Phase One” trade deal proved underwhelming for the market. The previous day (December 12), the offshore yuan surged as speculation that the deal was close to being done buoyed risk sentiment. Here’s a helpful annotated visual:

“Risk aversion is contagious, and coronavirus has infected confidence across the board at the start of the week”, SocGen’s Kit Juckes wrote Monday.

There’s a lot on deck for FX in the days ahead (e.g., BOE and the Fed), but for now, Juckes notes that “with oil and industrial metals prices lower this morning, a one-dimensional reaction for risk currencies seems likely: AUD, NZD, NOK are the G10 losers, with CAD and SEK also lower against yen, euro, Swiss franc and dollar”.


 

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