Asian FX Talking: Mixed prognosis

With Asian FX responding in varying fashion to the outbreak of the coronavirus in China, and its subsequent spread, there has been a lot of FX analysis as to which economies are most exposed to falling Chinese tourism, falling Chinese demand for commodities, falling Chinese supply of parts for supply chains and integrated manufacturing processes.

Much of that is already in the price, and is reflected in things like the Korean won’s volatility, the Thai baht’s fall from grace, and the Australian dollar’s drop to levels of weakness last seen during the global financial crisis.

But the assumption that this is essentially a Chinese outbreak, with some relatively minor overseas transmission, is a fragile basis for the markets’ recent improvement in sentiment even if it is currently supported by some relatively modest new case figures in recent days.

Were this virus to spread more widely outside China and even outside Asia, then we would of course face a very different and much bleaker global macro view, and also a very different FX perspective. Our 1m forecasts provide a taste of what that future might look like, but little sense of the degree.