FX: Looking For The COVID Correlation

Increases in COVID-19 cases can explain some of the recent diverging FX paths, such as Asian currencies’ outperformance. But when we look at last month's data, there seems to be no correlation with the stringency of containment rules, but this could partly be down to the lack of adequate quantitative measures.

Currency traders in South Korea

Better virus situation helping FX outperform

As global risk appetite faces the challenges posed by second virus waves, we looked into last month’s FX and virus-related data to see how much contagion and re-imposing of restrictions have impacted the FX performance.

The chart below shows the performance of some major currencies vs the USD in the period 7 September - 5 October plotted against the increase in confirmed COVID-19 cases per 1 million people in the same period. The intuition would be that a more serious contagion situation in a country has made the currency less attractive compared to its peers.

COVID-19 cases and FX performance

(Click on image to enlarge)

Source: Macrobond, ING

The negative correlation is in line with this intuition. Incidentally, this tends to endorse the notion that the recent outperformance of Asian EM currencies compared to other EM FX has been a function of Asia’s less concerning virus situation compared to other regions in the world.

No evidence that stringent measures played a role

Still, the response of the pandemic has been quite different in many countries and not always directly correlated with the number of cases. If FX performance is linked with the ability of a country’s economy to recover at this stage, it would mostly be the stringency of the anti-pandemic measures that would have an impact rather than the simple rise in infections.

The main issue is however finding a measure to track the deepness of restrictive measures. A commonly used indicator is the Oxford Stringency Index, where a higher score equals more stringent measures and would therefore need to show a negative correlation with FX performance.

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Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information ...

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