How did ‘Black Monday’ impact the FX market?

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10 March 2020


Growing concerns surrounding the COVID-19 virus wreaked havoc in financial markets on Monday, arguably the most extraordinary day of trading during the crisis so far.

hile the number of new daily cases of the virus inside China has eased almost to a halt (only 40 on Sunday), the number of cases continues to rise at an alarming rate around the rest of the world (Figure 1). South Korea, Iran and Italy now each have more than 7,000 cases of the virus, the latter reporting 460 deaths, the most outside of China. Containment measures remain in place across the globe in an attempt to control the spread of the virus, notably in Italy where approximately 16 million people remain in quarantine.

Figure 1: New Daily Confirmed COVID-19 Cases (23/01 – 09/03)

We outline below the pandamonium the virus is causing among some of the key financial markets around the world.


The main headline in the markets was arguably in commodities, namely the sharp drop witnessed in global oil prices. Crude oil prices shed around 30% of in value at one stage after a deal between Saudi Arabia and Russia collapsed. Concerns regarding a slowdown in demand induced by the virus and the increase in oil supply resulting from the breakdown in Saudi-Russia talks has hit the price of the commodity on two fronts, amplifying its sell-off to the largest daily drop since the early-1990’s.


Stock markets continued to collapse yesterday as investors fled higher risk investments in favour of safe-haven government bonds. The FTSE 100 index was down around 8% at one stage, with US equity indices losing a similar amount – the Dow Jones index shed almost 2,000 points at the open leading to a brief halt in trading. In mainland Europe, the Stoxx 600 extended its losses to more than 20% in just two weeks, led by a more than 10% drop in Italy stocks.

Fixed Income

As is customary during times of financial market stress or uncertainty, investors have fled higher risk investments and piled into lower risk strategies, including government bonds. As the demand for bonds pushes up their price, the yields on those bonds fall, given the inverse relationship between a bond’s price and its interest rate.

Notably, US Treasury yields have nose-dived, with the entire US yield curve now below 1%. The benchmark 10-yield yield fell below 0.35% at one stage yesterday, a remarkable drop of around 60 basis points since the beginning of trading on Friday.

Foreign Exchange

Those currencies hardest hit so far have been the ones whose economies are heavily dependent on the production of oil, including the Canadian dollar, Norwegian krone and Colombian peso. The Russian ruble was, however, the hardest hit, down almost 10% at one stage to its lowest level in four years.

Among the major currencies, EUR/USD continued its march higher, rallying above the 1.145 level yesterday evening and extending its gains to an eye-watering 6% since late-February, before giving back some of its advances. The main rationale for the move is the expectations for a narrowing in US-Eurozone interest rate differentials – the market is now pricing in a 75 basis point cut from the FOMC at its meeting next week, while the ECB has almost no room whatsoever to ease policy. As we outlined in our ECB preview report, we expect the bank to lower its deposit rate by 10 bp on Thursday, combined with an increase in the QE programme. The Fed on the other hand looks almost destined to cut rates all the way down to zero in the coming months, a full one percent below current levels. This could provide room for more gains in the euro in the coming days.

Figure 2: EUR/USD (Feb ‘20 – March ‘20), The safe-havens also continued to rally. The chief among those, the Japanese yen, was down below 102 to the dollar at one point, although it has since retraced some of these panic moves. As far as sterling is concerned, the UK currency briefly rallied above the 1.31 mark versus the broadly weaker dollar, although has since given up some of these gains.

As we have mentioned in the past week or so, the big focus among FX traders is now on what kind of response we can expect from central banks around the world. Those that have space to cut interest rates, such as the Fed, Bank of Canada, Bank of England etc., will continue to do so, many we believe down to or just above zero. Others that are not so lucky, such as the ECB, SNB and Bank of Japan, will instead use alternative measures to support their domestic economies. This, we think, may include pumping liquidity into the sectors that need it, or relaxing lending rules. Look for the ECB on Thursday to also call for European governments to support its efforts by ramping up fiscal spending.