FX Matters April 2021 | Article – HSBC VisionGo
What you may have missed last month
- US Dollar Index (DXY) weakened 2.1% amid falling yields and “risk on” sentiment
- FOMC holds rates, Fed Chair Powell says economy “a long way from our goals”
- ECB holds rates, leaves asset purchase programme unchanged
Summary – USD drops down
The USD weakened against all the major currencies in April as the surge in US Treasury yields, which had propelled the USD higher in March, cooled off. Likewise, broadly positive risk sentiment in the US stock market likely added to the USD selling pressure. The US Dollar Index (DXY) fell more than 2%* over the duration of the month, relinquishing most of the gains from March. The Federal Reserve (Fed) remained committed to an easy monetary stance and left both rates and its asset purchase programme unchanged on 28 April, and stated it would be patient until it had made substantial progress toward its goals.
The EUR rallied in April as firm risk sentiment and falling US Treasury yields helped it to climb 2.5% over the duration of the month. The move higher also came alongside very solid data which continually surprised on the upside – most notably in the survey data. Finally, a significant ramping-up of the vaccine rollout (which brought Europe much closer to the likes of the US and the UK in terms of the rate of daily inoculations) prompted further bullishness on the prospects for the Eurozone recovery, despite additional lockdowns and rising COVID-19 cases across much of the continent.
In April, the GBP climbed a relatively meagre 0.3% considering the prevailing USD weakness of April and was the G10 underperformer. That said, the modest move belied the range of price action during April, and in the middle of the month GBP-USD briefly climbed above 1.40. The fleeting strength came alongside a continued rally in global equities and also on the back of a gradual reopening of the UK’s domestic economy, which saw retail reopen, along with pubs and restaurants for outdoor service. GBP-USD came under pressure at the end of the month though, ending the month just above 1.38.
Elsewhere: Gold bounces back
Gold climbed 3.6% in April as the weaker USD environment and falling yields helped the precious metal put on a sterling performance throughout the month. In fact, April marked the end of gold’s losing streak, with the precious metal achieving its first monthly gain since December 2020. Gold had its best one-day performance on 15 April rising 1.6% as 10-year US Treasury yields closed below 1.6% for the first time in a month.
US: USD under pressure
The US Dollar Index (DXY) fell 2.1% in April as the March surge in US Treasury yields abated and the S&P500 Index continued to climb. In fact, most of the gains for the DXY over the previous month of March evaporated. The path for the DXY index seemed to be downhill throughout April. That said, the DXY did have its best one-day performance of the month on 30 April, rising 0.7%, but the general direction was a steady grind weaker.
The USD started the month on the back foot with the DXY index falling around 1% in its first four trading sessions. The weakness came alongside some strong gains in equities and this “risk on” sentiment was the key driver behind USD weakness. Through the middle of the month, 10y US Treasury yields started to drop more significantly away from their highs in March around 1.75%, and this likely added a further headwind to the USD.
On 2 April, non-farm payrolls data showed an increase of 916k jobs in March, which was significantly higher than the estimate of 660k. Likewise, after months of initial jobless claims hovering around 700k or more, the claims number fell below 600k for the first time since the beginning of the pandemic. Retail sales data also showed a massive monthly increase of 9.8% in March compared to estimates for 5.8%. On 29 April, Q1 US GDP data showed an annualised quarterly expansion of 6.4%, likely fuelled by the ongoing economic reopening and the substantial fiscal stimulus packages.
Despite blockbuster economic data throughout April however, on 28 April the Federal Reserve (Fed) remained on hold leaving both rates and its QE programme unchanged at USD120bn per month, but did note that both economic activity and employment have strengthened. The Fed noted the recent increase in inflation, but suggested it was largely reflecting “transitory factors”; the DXY ended the day down 0.3%.
Eurozone: The EUR’s got the key to the door
The EUR rose 2.5% against the USD in April, reclaiming much of its losses from Q1 and ending the month just above the 1.20 level. The move higher reflected positive risk sentiment, which carried the S&P500 Index to all-time highs, as well as US 10-year Treasury yields moving away from their highs. Likewise, the domestic recovery story played into the narrative of EUR strength, as the EU managed to more effectively begin its vaccination program. For example, on 30 April Germany administered 0.79 vaccine doses per 100 people, compared to 0.78 in the UK and 0.76 in the US (Source: Our World in Data). This was further illustrated on 27 April when the German government announced it intended to open vaccinations to all adults by June. That said, the commencement of a four-week lockdown in France on 3 April demonstrated the path to reopening remained uncertain.
Throughout April, the only way was up for EUR-USD, and it fell by more than 0.1% in only five trading sessions. The biggest one-day fall came on 30 April as the DXY gained more broadly, and EUR-USD fell 0.8%. Before that, however, the largest fall had been a meagre 0.2% on 22 April. In contrast, the EUR’s best day came on 23 April, where it rose 0.7% against the USD amid “risk on” sentiment
On 22 April, the European Central Bank (ECB) meeting proved uneventful, leaving both its policy rate and QE programme unchanged. During the press conference, ECB President Lagarde continued to stress the ECB’s commitment to supporting the economy and stated they did “not discuss” any phasing out of the pandemic emergency purchase programme (PEPP)*. Furthermore, they were steadfast to remaining data dependent in terms of adjusting the pace of asset purchases, and reaffirmed the ambition of a significantly faster pace of PEPP purchases in Q2 2021.
Economic data generally showed an improving picture, with Eurozone aggregate retail sales for February rising 3% over the previous month, and survey data generally was generally strong and above expectations. For example, the composite Eurozone flash manufacturing PMI came in at 63.3 in April compared to consensus estimates of 62.0. On 30 April, Eurozone aggregate Q1 GDP data showed a quarterly decline of 0.6%.
UK: The G10 underperformer
The GBP managed to eke out a small gain against the USD in April, but underperformed its G10 peers, rising just 0.3%. The minor gain also overshadowed the relatively volatile price action of the month, with the currency on something of a rollercoaster ride. On 5 April, GBPUSD rose 0.5% for the currency’s second best day of the month alongside “risk on” sentiment, which saw the USD weaken.
However, these gains were relinquished on 6 April as GBP fell 0.5% despite a broadly weak USD and the confirmation that England would be reopening retail and outdoor hospitality from 12 April. GBP fell further on 7 April as US Treasury yields ticked higher. Later in the month, GBP did stage a comeback, rocketing 1.1% higher on 19 April versus the USD, and briefly crossed 1.40 on 20 April before ceding gains. The GBP slipped further into the end of the month, ending around the 1.38 level following a 0.9% drop on 30 April.
Strong UK economic data, which generally beat consensus expectations, failed to support the GBP. Industrial production data for February showed a monthly increase of 1%, and retail sales data for March showed a remarkable 5.4% increase over the previous month, dwarfing expectations for a 1.5% increase. Labour market data also showed a positive picture, with the International Labour Organisation (ILO) unemployment rate falling to 4.9% from 5%, although a large segment of the population remain on a government-funded furlough scheme (i.e., a UK job retention scheme for COVID-19 lockdowns).
Part of the underperformance in the GBP may also be explained by the narrowing vaccine advantage which the UK had over many of its G10 peers in March. With the US having administered 71.8 vaccines per 100 compared to the UK’s 72.7 (Source: Our World in Data), and the EU rapidly increasing its pace of inoculations too, the relative “reopening story” for the UK appears to have weakened.
Japan: Falling yields provide relief for the JPY
The JPY strengthened 1.3% against the USD in April for its best monthly return since July 2020. The move higher came as US 10-year Treasury yields eased away from the recent highs set in March. The JPY had its best one-day performance on 19 April, driven by “safe haven” demand, likely prompted by geopolitical tensions in the Ukraine and elsewhere. This led to a stronger JPY, seeing it rise 0.6% against the USD on the day. On 27 April, the Bank of Japan (BOJ) held its policy rate at -0.1% and the central bank’s latest forecasts showed that inflation would not reach the stable 2% target rate over the course of BOJ Governor Kuroda’s term. The JPY fell 0.6% against the USD on the day, its worst day of April, but this likely had more to do with a rise in US 10-year Treasury yields than anything domestic.
Economic data largely showed a deteriorating situation, with core machine orders plunging 8.5% in February, despite market expectations for a 2.5% increase. Japan also saw a worsening virus situation, with the government declaring a state of emergency in Tokyo, Osaka, and other areas, in an attempt to control the latest outbreak and not jeopardise the plans for the Summer Olympic Games.
China: GDP growth rockets higher
The CNY put on a solid performance in April and appreciated 1.2% against the USD. The currency had its best one-day performance on 6 April, rising 0.4% versus the USD. A strong Caixin Services PMI and a backdrop of a weaker USD likely helped the CNY to climb. On 16 April, Q1 China GDP data showed an increase of 18.3% over the corresponding period last year. Despite the enormous growth rate, this fell below market expectations of 18.5% and USD-CNY ended flat on the day. Retail sales data for March posted a punchy increase of 33.9% over the corresponding period last year, but industrial production data disappointed expectations, rising 14.1% over the corresponding period last year, significantly lower than the consensus estimate of 18%.
Canada: Slow month for the CAD
The CAD had a relatively lacklustre April compared to some of its G10 counterparts, rising 2.2%, but USD-CAD did reach its lowest level since 2018, ending the month just under the 1.23 level. The first half of the month was relatively tranquil for the CAD, and it seemed to largely respond to general risk sentiment. However, on 20 April, the CAD fell 0.6% against the USD for its worst day of the month. The currency bounced back fast though, and on 21 April rose 0.9% as the Bank of Canada (BOC) announced it was tapering its weekly asset purchases to CAD3bn a week (from CAD4bn), quickly becoming one of the most hawkish G10 central banks. On the data front, employment data surprised on the upside, with an increase of 303k jobs in March. Retail sales data for February also beat expectations, rising 4.8% over the previous month. Part of the relative underperformance of the CAD could be explained by the domestic economic situation, with additional lockdowns being announced and a relatively slow vaccine rollout, which saw only 36 vaccinations given per 100 by the end of the month.
Australia: “Risk on” strength
The AUD rose 1.6% in April on the back of a broadly weaker USD, lower US Treasury yields, and rising commodity prices. On 6 April, the Reserve Bank of Australia (RBA) left its cash rate and 3-year yield target unchanged at 0.1% and re-emphasised its desire to maintain a highly supportive monetary policy. The AUD had its best day on 14 April, rising 1.1% on the back of a weaker USD and rising commodity prices. Later in the month, the AUD did ease back from its highs and fell 0.6% on 22 April alongside broader USD strength prompted by “risk off” sentiment. The AUD slipped a further 0.6% on 30 April as broader USD strength prevailed. Australia’s economic data generally continued to show strength, with the unemployment rate declining to 5.6% and retail sales data for March showing a 1.4% increase over the previous month.
New Zealand: The only way is up
The NZD climbed 2.5% in April and was the fourth best performer in the G10 space. Throughout April, the main direction for the NZD was upwards, and the month began with the NZD rising 0.5% against the USD on 1 April. That said, these initial gains were whittled away slightly on 7 April when the NZD fell 0.7% against the USD for its second worst day of the month, alongside broader USD strength and a rise in US 10y Treasury yields. On 14 April, the Reserve Bank of New Zealand (RBNZ) held its cash rate at 0.25%, but stated that it was prepared to lower the benchmark rate if needed. Despite the dovish comments, the NZD climbed higher as event risk dissipated, but rising commodity prices likely also played their part in the NZD’s 1.2% daily climb. NZD-USD came under some selling pressure on 30 April and fell 1.1% as broader USD strength prevailed.
Norway and Sweden: The SEK takes it all
The SEK rose 3.1% versus the USD in April and was second only to the CHF in the G10 space in April. It was near enough one-way traffic for the SEK too, with the currency falling against the USD on just eight trading days throughout April, suffering its worst one-day performance on 30 April, where it fell a modest 1.1% against the USD amid a backdrop of widespread USD strength. Conversely, the SEK had its best day on 6 April, rising 1% against the USD amid a backdrop of wider USD weakness. On the same day, the Riksbank also announced that its e- Krona project would require further investigation, and extended the pilot for another year. On 27 April, the Riksbank held rates at what was a relatively uneventful meeting, but did raise its growth expectations for 2021, signalling some optimism about the pace of recovery; USD-SEK finished flat on the day.
The NOK appreciated 2.8% against the USD in April, making it the third best G10 performer. The NOK climbed on the back of generally positive sentiment, declining US Treasury yields, and rising commodity prices. The NOK had its best one-day performance on 28 April, where it rose 1% against the USD, likely aided by a rally in crude and Fed Chair Powell’s continuously dovish messaging. Norway’s Economic data showed a mixed picture: industrial production for February fell 1.2% over the previous month and retail sales data for March was flat. CPI data also continued to show an elevated level of inflation in March, with consumer prices rising 3.1% over the corresponding period last year, although this was lower than the 3.4% forecast.
Oil: Recovery story fuels price rallies
Brent crude oil prices rose 5.8% in April as the economic reopening gathered pace and fuelled demand. That said, it was a rockier start to the month and prices fell 4.2% on 5 April as rising supply from OPEC+ (which includes the Organization of the Petroleum Exporting Countries (OPEC), Russia and other allies) likely weighed, and additional output from Iran also likely added further pressures. Thereafter, prices were relatively range bound until 14 April, where a sizeable draw in US crude oil inventories of almost 5.9m barrels helped prices surge higher, with Brent ending the day up 4.6%. On 20 April, Brent prices briefly topped USD68 a barrel, before paring gains and dropping back toward USD65 a barrel, as surging COVID-19 cases in India likely crimped the demand outlook. However, positive stories related to the US demand situation and an increase in US gasoline consumption to pre-pandemic levels fuelled a rally into month-end, with prices closing out the month at around USD67 a barrel.
Gold: Shining again
Gold had a strong April, rising 3.6% for its best one-month performance since December. Gold was likely driven higher by a weakening USD and falling US Treasury yields, despite a continuing decline in the level of exchange traded fund (ETF) gold holdings. April began with gold on the front foot, rising 1.3% on 1 April as US 10-year Treasury yields tumbled away from their March highs. As the month progressed, and the USD continued to weaken, gold was able to mount further gains, and on 15 April had its best day of the month, rising 1.6% alongside declining US Treasury yields. Another possible driver of gold strength came from a c.470% surge in imports of gold in India, rising to 167t in March. On 28 April, as the FOMC held rates and Fed Chair Jerome Powell signalled that the Fed was not in the process of thinking about tapering asset purchases, gold rose 0.3% on the day. In the last two days of the month, gold headed lower once more, ending the month at USD1769.13 per ounce.