Risk-Sensitive Currencies Dive, Safe Havens Soar Amid Coronavirus Fears

The Wuhan coronavirus continued to send shockwaves through the financial markets on Monday. Risk-sensitive currencies such as the Australian dollar fell to fresh lows while safe havens such as the Japanese yen and gold rallied sharply.

China’s National Health Commission warned on Sunday that the ability of the coronavirus to spread is getting stronger and that the number of cases of infections may rise. In China, the death toll from the coronavirus has risen to 81 and almost 3,000 cases have been confirmed. The virus has also been detected in the United States, Singapore, South Korea, Australia, Canada, France, Japan, Malaysia and Vietnam.

In an effort to contain the epidemic, China’s State Council announced on Monday that the Lunar New Year/Spring Festival holiday will be extended to February 2nd across the country. On Sunday, Hong Kong authorities prevented residents of China’s Hubei province from entering the city.

On Monday, money continued to flow into safe haven assets amid rising fears of an economic fallout from the virus. The Japanese yen and gold, rallied their highest levels in two weeks against the dollar. The head of the World Health Organization (WHO) stated last week that the Coronavirus is an emergency in China but not yet an official Public Health Emergency of International Concern (PHEIC).

Meanwhile, risk-sensitive currencies such as the Australian dollar and New Zealand dollar fell to their lowest levels of the year. The Australian Dollar is often treated as a proxy to the Chinese yuan, in part due to the fact that China is Australia’s largest trading partner. Expectations of a rate cut from the Reserve Bank of Australia (RBA) is another factor weighing on the Aussie.

Investors now look ahead to Wednesday’s FOMC statement and press conference. The CME Fedwatch tool currently shows an 87% chance that the federal funds target range will be kept steady at 1.50-1.75%.