With the coronavirus largely contained across Europe and Asia and some parts of the U.S., there is a sense that the worst of the pandemic may be behind us. As the global economy continues to reopen, many are still hopeful of a V-shaped economic recovery, as economic data such as purchasing managers’ indices are showing signs of life. Aggressive monetary and fiscal support, improved liquidity conditions, and lack of inflation provide a supportive backdrop for the rebound in economic activity. However, the recent uptick in infections in parts of the U.S. has raised fears that economic activity could once again be derailed. If these outbreaks fail to be contained and another round of lockdowns is enacted, it would deal a terrible blow to an economy already facing a severe contraction. A second wave could further paralyse business investment and consumer behaviour—turning hopes for a V-shaped recovery into hopes for a W.
Fueling the Rally
Oil prices have continued to rebound from lows reached in late April, trending near USD 40 per barrel, yet still below pre-crisis levels. Amid the virus-related shutdowns, global demand for oil was down nearly 30% year over year as economic activity worldwide was brought to a halt. At the same time, tensions flared between Russia and OPEC+ regarding market share, resulting in increased supply and further downward pressure on prices. As stay-at-home restrictions have eased across the globe and supply remains constrained, oil prices have rebounded. However, if a second wave of the coronavirus ends the rally in oil prices, hopes for a quick recovery in the energy sector could be dashed as we are already seeing rising bankruptcies and energy-exporting economies facing severe fiscal pressures.
The Buck Stops Here?
The U.S. dollar (USD), a traditional safe-haven currency, has been volatile as it weighs evidence of improving global economic data against a resurgence in coronavirus infections. Over the past quarter, the U.S. Dollar Index has fallen by almost 3% amid the global risk-on environment sparked by economic reopenings across the globe. However, there is no shortage of risks that could cause the USD’s recent downtrend to reverse course. Growing evidence of a second wave of the coronavirus, uncertainty surrounding the upcoming U.S. presidential election, and resurfacing tensions with China could send investors flocking back to the USD. But for now, a weaker dollar could be a respite for emerging market economies and their currencies as they struggle with the impacts of the global pandemic.
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