Market Analysis: “COVID-19 to dry up the liquidity in the FX market, quotes to become wider as participation tapers off.”

The Global Coronavirus situation continues to become grim by the day. Several countries across Europe have come to a grinding halt on account of total lockdown.

Economic activity has come to a standstill. Cases and deaths in the US are on the rise. There is complete uncertainty concerning when normalcy would be restored and what kind of damage it would do to the global economy until then.

This uncertainty has triggered a flight to safety. There is a scramble for US Dollars. US treasury yields have dropped on account of risk aversion.

Asian and EM currencies are weaker by 0.5-1% against the US Dollar. SGX is indicating that Nifty would be circuit down on open. Investors would be watching closely as India enters a crucial phase. The next couple of weeks would be extremely critical in terms of how the infection spreads.

The RBI would have to continue to ensure ample liquidity. It announced a Rs 30000 cr OMO to stabilize bond markets and to sterilize FX intervention.

We expect the liquidity to dry up in the FX market and quotes to become wider as participation tapers off. Operational and liquidity risk in such a situation would be on par with market risk.

Eur 1.0716, Gbp 1.1642, Aud 0.5745, Cnh 7.1240, WTI 23.07, Gold 1494, US 10 0.45% , US 2y 0.30%, India 10y 6.27%, Dow fut -900pts, DXY 102.26.