The coronavirus (currently still referred to as 2019-nCoV, which stands for 2019 Novel Coronavirus) is a contagious virus which has originated from Wuhan, the capital of the Chinese province Hubei. The virus has resulted in an outbreak which began in late 2019.
At the time of writing, the number of confirmed cases of 2019-nCoV in humans stood at 34,963, with 725 deaths and 2,394 recoveries (source: John Hopkins University).
The number of confirmed cases is growing, although the number of recoveries is growing relative to the number of deaths, which is promising. Over time, the number recoveries versus the number of deaths should converge on the underlying recovery rate, enabling us to more fully understand the death rate of this virus.
The number of deaths still pales in comparison to the number of deaths from seasonal influenza, which is in the region of 290,000 to 650,000 deaths per annum (source: World Health Organization). However, what is probably more important is not the death rate but the spread rate; the basic reproduction number, as they say in epidemiology. This is the “the expected number of cases directly generated by one case in a population where all individuals are susceptible to infection”. This is not a biological number so much as a function of human behavior. With effective containment, we can reduce the number.
Nevertheless, as I have mentioned before, the risks of the coronavirus to supply chains are significant, as China represents approximately 15-20% of world GDP. Products imported from China include both finished products and intermediate products, and hence large disruptions will affect all sorts of businesses abroad, including retailers, distributors and manufacturers.
Many businesses in China are closing, and as reported in the Wall Street Journal recently, the automotive industry is one of the industries most likely to be affected with the temporary shutdown of plants based in China. We do not need to make any projections to understand that over the short term, this will continue to be an issue for global trade even if containment of the coronavirus shows progress.
Which currencies are most likely to be affected? We have already seen traditional risk-on pairs such as AUD/JPY sell off, whereas safe-haven currencies like both the USD and JPY have strengthened (although in the latter case of the Japanese yen, it is perhaps somewhat ironic, given Japan’s proximity to China). This author believes that imports and exports could serve as important indicators of potential strength and weakness across G10 currencies. This article focuses on exports.
The G10 is a group of leading industrial nations, and in fact includes 11 countries in total: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, United Kingdom, and the United States. In the chart below (with data sourced from The Global Economy website and Trading Economics), I include the rankings of each member of the G10 and their corresponding 2018 Political Stability Index value (or PSI value; the higher the more stable, as measured by the World Bank) and the country’s current account as a percentage of GDP (or CA % of GDP).
More politically stable countries are likely to serve as safe havens in the foreign exchange space during times of increased uncertainty. Also, countries with current account surpluses (i.e., a positive CA % of GDP in the chart above) will also attract demand, as positive current accounts indicate a steady, underlying demand for a country’s currency supported by international trade.
However, with the coronavirus, we have another factor to consider: imports and exports from and to China. This author believes it is logical to assume that a country with a high export exposure to China is likely to suffer, as Chinese demand is likely to wane due to (hopefully mostly temporary) business closures and supply chain disruptions.
High import exposures to China, on the other hand, could mean that the importing countries could either redirect the same business to other countries or alternatively this trade could be redirected inward (i.e., those flows could instead favor domestic businesses). High import exposures to China could therefore have a “tightening” effect, strengthening the importing country’s currency due to the reduced international supply (liquidity).
While this article focuses on exports, bear in mind that China’s largest export consumers (i.e., those countries that import from China heavily) include the United States (20%), Hong Kong (12%), Japan (6.0%), South Korea (4.5%), Vietnam (3.4%), Germany (3.2%), India (3.1%) and the Netherlands (3.0%).
The first table below uses the most recent data available from Trading Economics for the exports of each country concerned (Switzerland, for example, indicates Germany being the top consumer of Swiss exports at 15% of all exports by value). This table (produced by this author) focuses on some of the largest consumers of the exports of each of the countries listed on the left-hand side. This table excludes Asian countries, except for India which is included.
To read the table, look to the left-hand side for the exporter, and then look to the columns to the right for each of that particular country’s consumers. This table is not complete (the table would be too large if it included all countries); however, it does provide a snapshot of how significant certain countries are to others with respect to exports specifically. The below chart is the same as the above, but focuses on certain Asian countries (excluding India) which are proximate to China and have reported greater-than-average confirmed cases of the coronavirus.
For each column (i.e. for each country that consumes exports of the countries on the left-hand side), the table above indicates how significant the export consumer is (the red-shaded values are greater, the green values are lower). It is clear that Australia and New Zealand have the most significant direct exposures to disruptions caused by the coronavirus outbreak. India is also exposed, as is Japan, and even Switzerland (two traditional safe havens).
The safest are apparently Canada, Sweden, the Netherlands, Germany, Belgium, Italy, France and the United Kingdom. The United States is moderately exposed, while its currency (the U.S. dollar, or USD) is also viewed as a traditional safe haven.
It is also worth considering the derivative exposures here; if a country is exposed to Australia, for example, this would serve as a derivative exposure since Australia itself is heavily exposed. The chart below ranks the derivative exposures, which are albeit crudely calculated, by multiplying the values which represent the top three consumers of each country’s exports by the values of those underlying consumers’ exposures to our select Asian countries (not including India). Note that the “top three” excludes Asian countries, which we have already given ample consideration to from the perspective of direct exposures.
For example, Australia is (as shown in the table above) heavily exposed to the select list of Asian countries (China, Japan, Singapore, Hong Kong, South Korea, Thailand, and Malaysia). The derivative exposure is calculated by looking at Australia’s non-Asian consumers of its exports, these being India, the United States and New Zealand. Australia’s exposures to these countries are multiplied by the direct exposures of those respective countries.
From the table, we can see that while Canada’s direct exposures are limited, the country has the most significant direct exposure (ranking first for the highest exposure, ahead of the others). Interestingly, Sweden appears to be the safest place to park cash, given its limited direct exposure and limited indirect exposure. The Swedish krona could potentially serve as the world’s greatest coronavirus safe haven. The euro may also be favored, as well as the euro. The Japanese yen, however, should be treated with great caution; while traditionally a safe haven, it does not make sense to buy JPY if one’s aim is to hedge against the potential economic effects of the coronavirus.
Note that the tables above are not fully comprehensive, as previously noted, but they do provide us with an overview of where the greatest coronavirus exposures lie.
If your global take is risk-on, the safest pairs to bid might be CAD/JPY, EUR/JPY, and USD/JPY. Risk-neutral trades would include buying the SEK/JPY, possibly the CHF/JPY pair, and potentially USD/JPY too (given that the USD can also function as a safe haven). The SEK/JPY trade could be interesting, given that SEK/JPY is currently trading at historical lows around the 10.70 level; the chart below illustrates this using monthly candlesticks.
(Chart created by the author using TradingView)
Risk-off trades should exclude JPY and could include shorting AUD and/or NZD against USD and SEK (i.e., short AUD/USD, AUD/SEK, NZD/USD, NZD/SEK).
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.