To say that markets have reversed themselves since the start of the Covid-19 pandemic would be a large understatement. The people of the world thought that Covid-19 was the start of another plague type disease and its ramifications would be catastrophic. 

While the number of deaths have been in the millions, the vaccination levels in first world countries have reached levels that are deemed manageable by health standards. We do not have full herd immunity yet, but we are on our way. At the time of this writing, China has announced no new outbreaks which has given hope to the rest of the world. The fourth wave is now running through unvaccinated populations with such swiftness that it might cause more deaths than the previous waves. However, that remains to be seen.

What happened at beginning of the outbreak

Initially, oil prices dropped, commodity-based currencies such as the Canadian dollar weakened, but the exchange rates of key emerging countries were battered. Brazil’s, Mexico’s, South Africa’s and Turkey’s currencies suffered losses between the end of February to the middle of March that were crippling. If these currency levels were to remain, emerging market countries would have recessions not seen since the 1930s. What was happening is that these countries were experiencing huge capital outflows, that means international investors who had assets in these emerging countries were selling as quickly as they could and sending the funds back to their home countries or buying U.S. dollars. In order to buy USD international investors sold the local currencies at prices that were significantly lower, it’s like when everyone wants to leave at the same time and there is only one door to get out, you take whatever price you are given.

On the other side of these flows, advance economies, such as Germany, Britain, France, Japan and the U.S. received capital inflows, particularly the U.S. In times of economic stress this is called flight-to-quality or flight-to-liquidity, investors rebalance their portfolios from risky to conservative assets, usually government securities. The Canadian dollar subsequently rebounded with a couple of weeks as analysts realized that the currency was vastly oversold in relation to market conditions. An article published on May 5 2020 shows the GDP in emerging markets as illustrated below.

currency chart
Total portfolio flows by region, USDbn

What do countries do when everyone is selling their currency?

When a country suffers a rapid outflow of foreign capital and depreciating currency, the country tends to rely on its Foreign Exchange Reserves (FX reserves) to slow down or stop the price depreciation by providing liquidity and some form of stability both domestic and international. The problem during this pandemic was not all countries had the same amount of FX reserves in order to combat their respective outflows. FX reserves are like a savings account held in different currencies other than their domestic currency. One country may hold billions in USD or Euros or Japanese yen, when the time is necessary, the central bank will sell these currencies to buy back its own domestic currency. This is called FX intervention and nearly all the central banks of the emerging counties were involved one way or the other. Some emerging central banks soon ran out of money but were able to arrange loans from the world’s advance economies such as Japan, Britain and the European Central Bank. In fact, the U.S. Federal Reserve allowed loans to countries that held U.S. Treasuries and used these as collateral.

Did it work?

As time progressed, markets globally started to stabilize, equities are not just back to pre-Covid levels, they are at all time highs, currencies are also back to pre-Covid levels and the global economy is growing, however, it is not at pre-Covid levels as certain sectors have yet to reopen or have set at specific levels.

Covid-19 impact on currency
– Year to Date NASDAQ Composite up 31%
– Year to Date S&P Index up 8%
– Year to Date Dow Jones Industrial Average flat 0%

Restaurants are allowed clients that are double vaccinated and are wearing a mask, hair salons, movie theaters are now open under the same guidelines depending on what the local laws are, these are just a few of the businesses that have been affected severely by the pandemic. Airlines are now examining passengers before getting on board the plane and are demanding that passengers wear masks as well. At the time of this article a leading pharmaceutical company has released a rapid Covid-19 test which will cost $5 and have a result within fifteen minutes.If effective this will allow the travel industry to open up more especially airlines. Countries will allow visitors that have been tested and may remove the self-isolation requirements. Currencies have also come back, some countries such as Argentina, Peru, Turkey, Indonesia  had imposed regulated limits on buying foreign currencies, but these have been subsequently removed.

Governments have relaxed international transfers at the business to business level, however, they imposed further measures to ensure that their domestic banking systems are fully prepared should there be a total fourth wave and possible economic shutdown.

The Currency Swings

On February 12th, 2020, the USDCAD was 1.3266, one month later at the height of the first wave of the pandemic, it was 1.4500, and at the time of this writing its 1.2580 and you have to check the latest currency rates if you want to know what are the rates right now. Not only has it come back to pre-Covid levels, it’s actually stronger. It should be noted that it took five months to come back, and one month to go lower. USDCAD fluctuations from late June to April 2021 based on Gold Price data illustrated below.

The Currency Swings
USD to CAD fluctuations June to Sep 2020

If one is in the import and/or export business, the past twelve months have been chaotic, and possibly the worst experience of their business career. This is where a good businessperson examines their budget, expectations of when to pay for or receive their foreign goods and use some form of hedging, such as forwards, options, or a combination of both. It mitigates some of the volatility such as this hopefully once in a lifetime economic downturn.

Where will the Canadian dollar go?

The last time the Canadian dollar was this strong to the USD was February 2018, and the question is “will it get stronger?”. There is no set answer, but in the short term it is likely to stay around these levels. The reason is that the Bank of Canada is the first central bank of the mark that stated that inflation is too big to ignore. It has changed its tune of keeping interest rates low for the foreseeable future, and while the Consumer Price indexes on both sides of the border seem to be tame, one cannot believe that with agricultural commodities such as wheat up 38% year over year, base metals such copper up 86%, year over year and the big winner standard plywood panels,  $1,223 per thousand board feet on April 9, up from $1076 a week earlier and twice the price from a year ago. All of these products are primary exports and the Canadian dollar is benefitting from these higher prices as exporters are now selling more USD to receive CAD.


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