Virus Outbreaks in Sydney and South Africa Cool Hot Currency Trades

The end of the quarter is derailing hot currency trades as the spread of highly contagious coronavirus variants sees restrictions re-emerge more than a year after the start of the pandemic.

It’s taken just a month for the South African rand to turn from the biggest winner to loser in emerging markets, with a surge in Covid-19 cases and a renewed tightening of economic restrictions reversing the currency’s market-beating gains in May to the worst emerging-market performance in June.

In Australia, rising Covid cases of the highly transmissible Delta variant have sent Sydney back into lockdown, with the risk-sensitive Australian dollar the worst-performing major currency this quarter.

“Although much has been made about the vaccine progress in the U.S., the U.K., and Europe, Covid-19 and its new Delta variant remain a severe problem for much of the world,” said Jeffrey Halley, senior market analyst at Oanda Asia Pacific Pte. “If we are at this point this time next month, many economic forecasts will need to be revisited for surgery.”

Virus Outbreaks in Sydney and South Africa Cool Hot Currency Trades

A range of new restrictions and delays to planned reopenings have forced a re-think of the global reflation narrative, hurting the currencies of nations facing outbreaks as well as those geared toward a revival in global trade.

European equities were led lower by travel firms on Monday as the Delta strain looked to derail summer tourism, while Hong Kong said it will ban all passenger flights from Britain starting Thursday.

There are some glimmers of hope, though. Sterling was the best-performing major currency on the day -- heading toward $1.40 -- after the appointment of Sajid Javid as the U.K.’s new Health Secretary. That’s seen by some as reducing the likelihood of extended virus restrictions in the nation, with Prime Minister Boris Johnson saying Monday that July 19 would “very likely” remain the date for ending coronavirus restrictions.

“The rally has a lot to do with the clarity that Javid has brought to the reopening time line,” said Simon Harvey, senior analyst in London at Monex Europe. “A rise back above $1.40 is inevitable in our view, markets just needed a nudge in the right direction”

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