Covid 19’s Effect on the Foreign Exchange Market

Tarsoly Bálint István (2022) Covid 19’s Effect on the Foreign Exchange Market. Pénzügyi és Számviteli Kar.

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Absztrakt (kivonat)

Between 2013 and 2016, the turnover was 5066.352 Billion USD/day, which showed a reduction of almost 300 Billion USD turnover in the FX instruments market. By 2019, for the starting period of the central topic of my thesis, the turnover increased by 130% - 6580.986 Billion USD/day. Based on the data of the next three years, the market activity in 2022 exceeded the previous period by 114% and peaked at the level of 7508.321 Billion USD/day. The FX market showed an increase of 988 Billion USD/day in the period 2019 – 2022. The trajectory of the three main instruments shows a more varied picture, which shows even greater volatility. In the period between 2013-2016, FX swaps (106%) and outright forward transactions (103%) increased slightly, while spot transactions decreased to the level of 81%, therefore the consequence is a decrease in total turnover.  Based on a similar trend in the period between 2016-2019, the volume of FX swap (134%) and outright forward (143%) transactions increased, while spot transactions increased by 120%. This can be attributed to the fact that all segments of the overall market were growing. The period between 2019-2022 shows a slowing trend - 114% growth - which represented 119% FX swap growth and 117% outright forward growth, while the spot market only produced 106% growth in this period. During the COVID period - which almost coincides with the 2019-2022 FX base period - it can be read from the facts of the world market and the Hungarian market that the spot turnover stagnated or did not grow at the same rate as the other products. This market trend is primarily due to the fact that the activity of some of the largest corporate customers - agriculture, automotive industry, construction industry - decreased, while the turnover of the energy sector and the pharmaceutical industry increased. However, the most significant increase was shown by the flow of financial institutions. This process was due to the fact that from the end of February 2020, the volume of international trade fell almost magically, and business trips and tourism came to a complete halt. Financial markets experienced a collapse not seen since the 2008 financial crisis. Global quarantines, closures of countries, cities, and sectors have shaken all segments of the world economy. The above processes led to the further concentration of FX markets, more than 80% of foreign exchange trade took place on the markets of five countries. But while it decreased in America, it increased in the United Kingdom and rose even more than the global growth in Hong Kong. Although multinationals have closed their Chinese-based factories and governments have only announced stimulus packages for their own local economies, Chinese FX trading activity has nevertheless achieved significant growth. RMB increased from 4% turnover level in 2019 to 7%. From the second half of 2021, when vaccinations began in developed countries, the world economy began to reopen.  It can be concluded that in 2020, the decline in economic performance of the main euro zone countries - 12% GDP decrease - and the countries of the Visegrád region - 13% GDP decrease - stopped. In 2021, a continuous increase was registered, reaching the level of 15-16%. The developed countries of the world economy - including the member states of the European Union - have been rebuilding their economic processes at an ever-accelerating pace, which is also explained by the expansion of the FX market volume presented above. In the second half of 2021, corporate clients returned to the FX markets, and in addition to the spot transactions typical of them in the previous periods, swap and outright forward transactions came to the fore. The leading states of the world economy were able to keep the core inflation of their states within manageable limits. In America, the prognoses expected a significant reduction in inflationary processes as early as 2022. This happened despite the fact that the 4.4% PCE price index in August 2021 exceeded the expected forecasts by 100%, and the FED expected the price index to be 2%. In Hungary, inflation rose above 7% (on a year/year basis) in November 2021, and its slowdown and permanent fall below the 4% level by the end of 2022 to the beginning of 2023 was forecast.  One of the main raw material prices, the development of the TTF gas price, did not reach 100 EUR/MWh until the end of 2021, which low price basically helped to keep the cost burdens of all the players in the sector at the same level. This primarily affected large-scale agricultural producers who used fertilizer products produced from natural gas to a significant extent.  As I already wrote in the third chapter, a significant number of economists predicted a global recession for the years 2021-2022. This occurred and was accompanied by a sharp spike in volatility in global FX markets. This prediction came about as the exchange rate of the most traded EUR/USD currency pair rose from 1.1111 EUR/USD to 1.0533 by the beginning of May, so the American currency strengthened significantly. This repeated the trend that started in 2018 from the 1.2520 level. The trend reversed in May 2020 and by the end of 2020 the US currency weakened to the EUR/USD exchange rate of 1.2270. After a three-month decline - 1.1780 EUR/USD - in mid-May 2021, we witnessed the strengthening of the euro again with an exchange rate of 1.2230 EUR/USD. From the summer of 2021 to October 2022, the USD strengthened continuously. - which after the outbreak of the Ukrainian-Russian war reached the level of parity and even fell below it. But this only partially contributed to the events caused by the pandemic, which is the central topic of my thesis.  At the end of 2019, the forint closed at 329.36 EUR/HUF and 295.35 USD/HUF, and its value continuously decreased against both currencies. The dollar began a stronger growth, peaking at 329.66 in April 2020, which lasted until August 2021, when the exchange rate dropped again below 300 USD/HUF. In summary, we can say that between March 2020 and February 2022, the exchange rate of the forint fell by about 10% compared to the euro and the dollar. This was mainly due to the increasing effect of the already mentioned inflation. The same process as in the world economy was noticeable in the interventions of the Hungarian central bank, to prevent it from turning into recession at the beginning of the pandemic, which is why the base interest rate was not raised. The total closure of several sectors strengthened this process; on the one hand, they tried to keep the economy alive with these cheap and surplus resources by further reducing the benchmark interest rates and various financial asset purchase programs.   From August 2019, the FED continuously reduced its key interest rate, which reached the level of 0.25% between March 16, 2020 and March 17, 2022. Despite inflation rising above the psychological limit of 2%, the American central bank did not change its key interest rate. The ECB set its interest rate at 0.25% between March 16, 2016 and July 13, 2021, and during the pandemic, it wanted to contribute to boosting the economies of the European Union countries not by changing the base rate, but, similar to the FED, with various asset purchase programs. Before the development of the Hungarian central bank base rate, let's look at some core inflation data: in September 2019, inflation (year/year) was 2.8%, by January 2020 it had reached the level of 4.7%, which led to the weakening of the forint exchange rate. Inflation decreased to 2.2% in the following five months, which contributed to the strengthening of the forint exchange rate of 362.91 EUR/HUF on March 29, 2020, and 344.367 EUR/HUF on May 31. On June 24, 2020, the Hungarian National Bank stepped in for the first time three months after the FED cut interest rates and reduced the base rate by 15 basis points to 0.75%. It reduced this by another 15 basis points to 0.6% less than a month later. This is also interesting because inflation rose to 3.9% in August 2021, although by December it had settled at a level of 2.7% with a continuous monthly decrease. Although the year 2021 resulted in significant GDP growth, inflation reached a level of 5.3% in June 2021 – crossing the upper limit of the MNB's inflation tolerance band of 4% – therefore the market expected an increase in the base interest rate as a result. Despite the inflationary pressure, the MNB raised it to only 0.9% on June 23, 2021, which was against market expectations. Although the following months led to a continuous increase in the base interest rate, despite inflation rising to 8.3% by February 2022, the central bank base rate was raised 8 times, but it was still only 3.4%. It is interesting that the forint approached the EUR/HUF exchange rate of 370 EUR/HUF only at the end of December 2021 as a result of significant inflationary pressure, which shows that market participants had confidence in the growth of the Hungarian economy. The US dollar, on the other hand, has been continuously increasing since June 2021 (USD 283.555/HUF) and reached HUF 326 in December 2021. It can be concluded that in the second half of 2021, the Hungarian currency weakened by more than 10% compared to the US dollar. The soaring inflation occurred due to the price-inflating effect of rising food prices, increased global energy prices (a 200% increase in TTF gas prices), raw material shortages, chip shortages, disruptions in production and supply chains, and transportation difficulties (container shortages). Most of these factors reflect problems on the supply side. On the other hand, after the pandemic, the demand side quickly recovered by 4Q 2021 – 1Q 2022. Differences between demand and supply kept the price pressure high and this caused not only the increase in inflation expectations, but also the level of inflation kept at a high level. The Ukrainian-Russian war that broke out on February 24, 2022, the economic growth and the consolidation of economies in the world economy in 2021 following the reduction and abatement of the epidemic became nothing in an instant. The war set not only the world economy, but the entire society on a new path, compared to which the events of COVID, which passed quickly but caused a lot of human suffering, were not comparable to the losses caused by the war.

Intézmény

Budapesti Gazdasági Egyetem

Kar

Pénzügyi és Számviteli Kar

Tanszék

Menedzsment Tanszék

Tudományterület/tudományág

NEM RÉSZLETEZETT

Szak

Gazdálkodási és menedzsment

Konzulens(ek)

Mű típusa:	diplomadolgozat (NEM RÉSZLETEZETT)
Kulcsszavak:	Base rate, ECB, FED, foreign exchange market, FX, FX Forward, FX Spot, FX Swap, MNB
SWORD Depositor:	Archive User
Felhasználói azonosító szám (ID):	Archive User
Rekord készítés dátuma:	2023. Ápr. 21. 10:11
Utolsó módosítás:	2023. Ápr. 21. 10:11

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