US Dollar Jumps As Second-Wave Fears Emerge

The rhetoric around the first wave of coronavirus infections is not done yet and already cases are rising again in the United States. Florida, California, and Texas are just some of the states currently declaring worrying numbers, which in turn had stimulated flows into the US dollar. A week ago we’ve put under a question mark the rise of the EURUSD pair, and weakness is already showing, given the pair eased from 1.14 to 1.1250 at the Friday close.

What could a second-wave mean?

Daily new cases in some states are above their 7-day average, the main reason why fears of a second-wave have already emerged. Experts were expecting it to occur in the fall, but a series of protests in the US had made people neglect social distancing measures. Also, some states had been keen on imposing restrictions and now they have to pay the price.

At a global scale, the situation is mixed. Countries with a proactive and decisive approach had managed to contain the virus, even though some cases still show up. At the same time, there are countries where the situation had been poorly managed and are still struggling with a high infection rate. This could be a sticking point moving forward, as some countries want to fully reopen to foreigners, but the fear of importing cases will prevent them from turning back to 2019 conditions.

Most importantly, the second wave of infections will damper the fragile economic recovery and aggravate the current negative economic outlook for 2020. Although countries will not go into lockdown, some people might be fearful to behave normally, knowing they might get infected. Economic activity will remain subdued and some asset classes, in particular stocks might perform poorly

Currencies favored in case things get bad

With regards to currencies, countries managing to contain the virus will get “big dividends”. We’ve already talked that Australia and New Zealand are favored due to their geographical location. Just recently, New Zealand reported several days in a row without a single infection found, making it one of the first coronavirus-free countries.

If risk aversion returns, flows will go into the US dollar again. The DXY, or the US dollar index is already showing signs of recovery, after a strong drop, communicating market participants are still reluctant on the prospects for economic recovery. The number of new cases globally continues to rise, which means that uncertainty will be the name of the game in the near term.

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