Currencies rebalance as COVID chaos shifts to control

The worst of the economic devastation caused by the COVID-19 shutdowns appears to be behind us and equity markets, oil prices and the Canadian dollar are recovering from the lows hit in March.

Restrictions on public gatherings and on business are easing and investors hope that people will start spending again, although likely not at the rate they were before the virus hit.

It is clear that many months of economic hardship remain ahead of us, but we hope we can manage disease outbreaks enough to avoid reimpositions of nationwide shutdowns.

In its monthly update last week, the Bank of Canada kept its interest rate steady at the low level of 0.25 percent and scaled back other measures it had taken in March to help the economy.

The bank’s deputy governor said there were reasons to hope that the worst can be avoided and noted improved spending on cars and houses and improved measures of consumer confidence.

The United States unemployment rate actually dropped to 13.3 percent in May from 14.7 percent in April, and in Canada, while the rate rose to 13.7 percent, that was better than the expectation for 15 percent.

The same glimmers of hope are appearing in Europe, China and elsewhere.

In currency markets, the result is that the flight to the safety of the U.S. dollar that occurred in mid-March is starting to ease.

In mid-March the U.S. dollar was soaring against most currencies.

The Russian ruble lost about 25 percent of its value. The euro bounced all over but at one point was down about four percent.

The Canadian dollar fell about 10 percent to almost US68 cents on March 18-19, down from the 75-76 cent range in February.

By the end of March, it had partly recovered and through April it ranged mostly between 70 and 72 cents.

In late May it broke out and rallied another two cents to trade around 74 cents last week.

Factors beyond COVID-19 were also at work and the currency swings affect competitive balances.

For example, the drop in oil prices caused by the COVID-induced reduction in fuel demand and the oil price war between Saudi Arabia and Russia put added pressure on the Canadian dollar.

And in Brazil, the plunge in the currency was even greater, dropping by a third. That helped make its newly harvested soybeans a bargain compared to American soybeans.

Brazil’s March soy exports jumped to 11.6 million tonnes, up 38 percent from the same month last year. A large percentage of the soybeans went to China.

Exports the following month soared to the stratosphere to a record-shattering 16.3 million tonnes, up 73 percent from the same month last year.

To put that into perspective, Canada exported a total of 3.8 million tonnes of all crops in April.

It appears the Chinese could not overlook a Brazilian bargain even though they had committed in the recent trade deal with the U.S. to buy vastly more American farm crops. I should note though that although U.S. soybean exports to China are weak, its pork exports to China are at record-breaking levels.

As the COVID chaos calms, the premium of the U.S. currency is scaling back and the disadvantage that U.S. crop exporters faced is lessening.

Improving export hopes, particularly hope for shipments to China, helped lift U.S. soybean futures by about 3.5 percent last week, the biggest one-week gain in eight months. Wheat and corn futures were also firm on export hopes.

We all hope that the worst is behind us but we also must be aware that it will take herculean effort and time to get economies back to where they were before the pandemic.

Infection rates are falling in most of the major economies of the Northern Hemisphere so lockdowns are being lifted. It will take a few weeks to know if having more people circulating will boost the infection rates higher again. A key factor in the U.S. will be the impact of the nation-wide protests over racial justice.

We should also be aware that the epicentre of the pandemic has shifted to the Southern Hemisphere where infection rates are rapidly climbing.

But even with all the uncertainty, it appears that governments and business in most of the world can shift from panic mode to management mode. They will need to find protocols for opening businesses in a way that demonstrates reasonable safety for employees and customers and lift consumer confidence until an effective vaccine is developed and circulated widely.

However if the virus proves to be less manageable than we hope, then expect a retrenchment in currency markets to the U.S. dollar and weakness in the loonie.

And in general, I expect the slow crawl back to economic recovery and the eventual need for governments to shift away from stimulus and toward deficit control will keep the loonie at a disadvantage to the greenback.

I’m no currency expert, but I expect the loonie will be valued at less than 75 cents for a long time.

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