FX Matters December 2020 | Article – HSBC VisionGo

December highlights

Finance  ·    ·  14 mins read

What you may have missed last month

  • US Congress passes USD900bn stimulus bill
  • New COVID-19 strain announced amid vaccine rollout
  • UK exits transition period with a Brexit trade deal

Summary - Vaccine + Stimulus = Weak USD

The USD weakened in December as ‘risk-on’ sentiment from November continued, with hopes rising on the vaccine rollout and prospects for additional economic stimulus. The Federal Open Market Committee (FOMC) meeting on 16 December changed relatively little, with the Federal Reserve (Fed) continuing its asset purchases at USD120bn per month and keeping policy rates close to zero. The announcement of a new COVID-19 variant spooked markets on 21 December and prompted an intraday spike in the US Dollar Index (DXY) of 0.8%, but fears waned over the day as reports claimed that the current vaccines would still be efficacious against the new variant. Overall, the DXY ended the month down 2.1%.

The EUR climbed 2.4% against the USD despite additional restrictions being imposed across the continent, notably with Germany entering a new lockdown to curtail the rampant rise in infections. At the European Central Bank (ECB) meeting on 10 December, an expansion to the Pandemic Emergency Purchase Programme (PEPP) of EUR500bn met market expectations and on the same day, EU member states agreed to pass the Next Generation EU Fund. These were treated as the green light for further EUR appreciation. An EU-China investment deal clinched at the end of the month gave a final strong boost to the currency, and EUR-USD hit its highest level since 2018 on 31 December.

December was a volatile month for the GBP, with GBP-USD moving in tandem on news of a new COVID-19 variant and Brexit progress. Although the Bank of England (BOE) met on 17 December, the central bank chose to leave rates and its quantitative easing (QE) programme unchanged. Later in the month, the UK finally saw a breakthrough on Brexit and on 24 December, the UK and EU finalised a trade deal. The UK exited the transition period on 31 December, and GBP ended the month up 2.6% against the USD.

Elsewhere: Gold bounces back 

After a particularly painful November, gold bounced back in December as a weak USD helped the precious metal climb 6.8% higher over the month. Gold had its best day right at the start of the month as the US Dollar Index (DXY) weakened markedly. The approval of a US stimulus package, Brexit uncertainty and renewed virus concerns also pushed gold higher throughout the month. That said, gold struggled to gain further as vaccine optimism continued to act as a drag on “safe haven” demand, and exchange traded fund (ETF) holdings continued to fall.

US: Down in the doldrums

The US Dollar Index (DXY) continued to decline in December as markets remained optimistic about the rollout of a vaccine and additional economic stimulus, and the Federal Reserve (Fed) continued to signal its lower for even longer policy. The USD fell against all of its G10 peers, and the DXY ended the month down 2.1%. 

It was a rough start to the month with the DXY falling 0.6% on 1 December as ‘risk-on’ sentiment continued on vaccine optimism. On 4 December, non-farm payroll data disappointed the market with an increase of 245k jobs in November compared to consensus expectations of an increase of 460k jobs. However, this did not catalyse ‘risk-off’ sentiment, and was instead largely seen as paving the way for additional stimulus from US Congress. Throughout the month, there was no respite for the US as economic data mostly disappointed; for instance, retail sales numbers for November fell 1.1% over the previous month, against consensus of a 0.3% decline. On 21 December, the DXY spiked on the announcement of a new COVID-19 strain in the UK, but eventually pared gains as fears were assuaged and ended the day almost flat. 

On the policy front, the Federal Open Market Committee (FOMC) held rates at close to zero and maintained their current asset purchase stance on 16 December. There had been some speculation that the Federal Reserve (Fed) would adjust its asset purchases to focus on the longer end of the yield curve, but this did not materialise. Instead, the Fed continued to state the importance of fiscal support, and pledged to keep its asset purchases at the current pace and rates at zero until “substantial” progress had been made toward its objectives. Fiscal support was eventually provided on 22 December as Congress passed a USD900bn pandemic relief bill. 

Eurozone: Given the green light

The EUR climbed persistently throughout December amid an underwhelming European Central Bank (ECB) decision, speculation of a Brexit trade deal, and news of an investment deal with mainland China. This was despite a challenging pandemic situation on the continent which forced Germany and the Netherlands to enact lockdowns. All in all, the EUR rose 2.4% against the USD. 

On 10 December, the ECB increased the size of its Pandemic Emergency Purchase Programme (PEPP) by EUR500bn and kept rates on hold. Despite the central bank appearing concerned over the relatively high level of the exchange rate, the EUR climbed 0.5% higher on the day, and there was little sign of anything more significant than jawboning the currency to stop further appreciation. While a host of ECB speakers tried to talk the EUR-USD exchange rate down, it was to no avail and the EUR continued strengthening throughout the month. 

The end of the month provided a hurdle for the EUR in the form of a new COVID-19 strain, and the currency briefly slipped. Although the completion of the Brexit trade deal and news of an investment deal with China allowed the EUR to gain ground and reach its two-year high on 31 December, the currency was not able to sustain this level and fell on the day. 

Data continued to outperform expectations in the Eurozone in December. On 16 December, Eurozone PMI data beat expectations with a print of 49.8 compared to an estimate for 45.7. Furthermore, retail sales data also outperformed expectations. For example, in Germany, retail sales in October rose 2.6% over the previous month, significantly higher than the consensus estimate of 1.2%.

UK: “It’s a deal, it’s a steal, it’s the sale of the century”

December was a month of moving deadlines for the GBP, and the currency oscillated in line with the changing rhetoric towards a Brexit agreement. The month began with the three key stumbling blocks still in place, namely the level playing field, fishing rights, and the governance of the deal. As the month wore on, negotiators appeared to make progress on two of the issues, but fishing rights continued to prove problematic until later in the month. On 24 December, both sides managed to finalise a Brexit deal. This allowed GBP-USD to break past the two-year high of 1.36 and end the month up 2.6% against the USD. However, in the context of USD weakness, the GBP was actually a G10 underperformer in spite of this apparent good news.

Despite rolling out its vaccination programme on 8 December, the UK was still plagued with virus concerns as it became increasingly clear that a new COVID-19 strain was spreading within its borders. On 20 December, London and other parts of England were placed under more stringent ‘Tier 4’ restrictions (that mean people must stay at home and not meet up with other households) due to the increasing COVID-19 cases and uncertainty around the new virus variant. In response, GBP-USD saw a steep intraday decline on 21 December. But on affirmation that the current vaccines would likely work against the new variant, the GBP pared its losses and ended up 0.4% against the USD on the day.

On the data front, the UK’s economic data largely beat analyst expectations in December. Industrial production numbers for October surprised to the upside with an increase of 1.3% over the previous month compared to an estimate of 0.3%. Although the November lockdown led to a fall in retail sales numbers, the extent of the decline was smaller than consensus expected, and the unemployment rate was lower than expected.

Japan: A reliable “safe haven”

The JPY climbed 1% against the USD in December as broad USD selling helped the “safe haven” currency rally modestly. On 18 December, the Bank of Japan (BOJ) decided to keep rates on hold at -0.1%, although Governor Kuroda reiterated the BOJ’s willingness to support the economy through easing measures if necessary. 

Economic data were relatively mixed. For instance, although core machine orders rose 17.1% in October over the previous month, much higher than consensus of a 2.5% increase, Japan also saw retail sales falling 2% in October over the previous month, compared to consensus expectations of a 0.8% decrease. Nonetheless, the data surprises appeared to have little influence over the path of the JPY, with external drivers seeming to dominate domestic factors.

China: RMB continuing to strengthen

The CNY rose 0.8% against the USD in December as broad ‘risk-on’ sentiment helped EM currencies to outperform. That said, the CNY climbed relatively less than many of its peers and, after the first few days of appreciation, largely traded sideways between 6.51 and 6.55. 

Chinese economic data showed a continued recovery, with industrial production data for November showing a 7% YoY increase and retail sales rising 5% over the same period last year. China also registered a record 21.1% YoY increase in exports against consensus expectations of a 12% rise, suggesting that a broader recovery in the world economy may be underway.

Canada: Foiled by oil

Although the CAD rose 2.2% against the USD, this belied the major swing in USD-CAD that occurred partway through the month. The first half of the month saw renewed strength in oil prices propelling the CAD further. Despite new restrictions in several provinces, some mildly dovish commentary from the Bank of Canada (BOC) governor, and generally mixed economic data, the CAD surged against the USD and on 17 December, the currency was up 2.4% against the USD. However, later in the month, oil prices were hit by demand concerns over the emergence of a new virus strain and the CAD fell alongside oil prices. Even though the CAD managed to strengthen towards the end of December, the currency was still one of the worst G10 performers in December. 

Australia: Upwards Down Under

The AUD outperformed its G10 peers, rising 4.8% against the USD in December. The currency saw a strong start to the month with Q3 GDP up 3.3% QoQ against consensus expectations of a 2.5% rise; AUD-USD rose 0.4% on the day. Rising commodity prices likely supported the AUD and on 10 December, AUD-USD reached 0.7500, its highest level since 2018. Although virus concerns weighed on the AUD, it was bolstered by strong economic data and ‘risk-on’ sentiment and finished off a strong performance for the month. 

New Zealand: Risk appetite driven

The NZD ended up 2.4% against the USD alongside rising commodity prices and positive economic data. On 2 December, the Reserve Bank of New Zealand (RBNZ) governor commented that the RBNZ was prepared to implement negative rates if necessary, and although the NZD fell after the governor’s speech, it strengthened on the day to end effectively flat. Thereafter, the NZD rose and fell mostly in line with changes in risk appetite, but gradually pushed higher on rising commodity prices. On 16 December, Q3 GDP data positively surprised with a print of 14% QoQ against an expected 12.9%. Following the New Zealand finance minister’s comments that the NZD rally reflected the strength of the economy, NZD-USD broke through 0.7150, its highest since 2018. The announcement of a new COVID-19 variant led to a momentary slide in the NZD, but the currency managed to pare losses towards the end of the month.

Norway and Sweden: Soaring Scandies

The NOK rose 3.8% against the USD in December. Initially, the NOK appeared on track for a strong performance against the USD on the back of a rally in oil prices. Additionally, the NOK strengthened further on hawkish sentiment from the Norges Bank in its 17 December meeting, where the central bank held its policy rate at zero but projected a faster pace of rate hikes. However, the NOK faltered on news of the new COVID-19 variant, and at one point slid nearly 2.8% against the USD on 21 December. Nevertheless, the NOK managed to recover for a decent gain against the USD. 

The SEK finished up 4.3% against the USD. On 7 December, the Riksbank cautioned that growth prospects now looked less favourable, and pledged to continue monetary support for as long as necessary. Despite the pessimistic sentiment, the currency rose 2% against the USD on the day. Economic data continued to surprise to the upside, with unemployment data for November at 7.7% against a consensus forecast of 8.4%; retail sales for November were also better than expected.

Oil: Stumbled at the last moment

The month saw oil prices move higher. On 3 December, OPEC+ (which includes the Organization of the Petroleum Exporting Countries (OPEC), Russia and other allies) agrees to unwind output cuts more slowly than initially expected led Brent crude oil prices to increase modestly on the day. As more clarity around vaccine distribution programmes emerged, Brent crude oil prices steadily increased and broke past USD50 per barrel, the highest since March. On 14 December, OPEC lowered the demand outlook for 2021. This temporarily sent oil prices lower, but they rebounded over the next few days with Brent crude oil prices reaching an intraday high of USD52.48 per barrel on 18 December. 

However, the announcement of a new COVID-19 variant gave rise to demand fears and oil prices plummeted on 21 December. Despite reports suggesting that current vaccines were still effective against the new virus strain, Brent crude oil prices failed to recover to their monthly high and eventually ended the month up 8.7% at just above USD51 per barrel. 

Precious Metals: Stimulated by stimulus

Gold rose throughout the month to finish up 6.8% in December. The start of the month saw a spike in virus cases and the continuation of US stimulus talks, pushing gold prices higher as investors likely increased their demand for gold as a “safe haven” and an inflation hedge. As the month progressed, gold prices fluctuated in line with progress on the US stimulus deal. Gold gained nearly 1.6% on 7 December as progress on the deal was made, but then fell the same amount on 9 December when the stimulus talks encountered some obstacles. 

In the latter half of the month, gold prices increased further as a US stimulus deal appeared increasingly likely. However, what gave the precious metal the final push was the announcement of a new COVID-19 strain on 21 December, which sent gold prices spiking above USD1,900 per ounce. That said, as fears were allayed, gold prices fell and ended the day almost flat. When the US stimulus deal was finally approved on 22 December, gold steadily rose and ended the month around USD1,898 per ounce. 

Disclosure appendix

This document is for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Information in this document is general and should not be construed as investment advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on it, consider the appropriateness of the information, having regard to their objectives, financial situation and needs and, if necessary, seek professional investment and tax advice.
Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products. 
The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results.
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered here on a principal or agency basis.
Whether, or in what time frame, an update of this information will be published is not determined in advance.

Additional disclosures
1. This report is dated as at 05 January 2021.
2. All market data included in this report are dated as at close 04 January 2021, unless a different date and/or a specific time of day is indicated in the report.
3. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
4. You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument or of an investment fund.


Disclaimer

This document is prepared by The Hongkong and Shanghai Banking Corporation Limited (‘HBAP’), 1 Queen’s Road Central, Hong Kong. HBAP is incorporated in Hong Kong and is part of the HSBC Group. This document is for general circulation and information purposes only. This document is not prepared with any particular customers or purposes in mind and does not take into account any investment objectives, financial situation or personal circumstances or needs of any particular customer. HBAP has prepared this document based on publicly available information at the time of preparation from sources it believes to be reliable but it has not independently verified such information. The contents of this document are subject to change without notice.
HBAP is not responsible for any loss, damage or other consequences of any kind that you may incur or suffer as a result of, arising from or relating to your use of or reliance on this document. HBAP gives no guarantee, representation or warranty as to the accuracy, timeliness or completeness of this document.
This document is not investment advice or recommendation nor is it intended to sell investments or services or solicit purchases or subscriptions for them. You SHOULD NOT use or rely on this document in making any investment decision or decision to buy or sell currency. HBAP is not responsible for such use or reliance by you. You SHOULD consult your professional advisor in your jurisdiction if you have any questions regarding the contents of this document.
You SHOULD NOT reproduce or further distribute the contents of this document to any person or entity, whether in whole or in part, for any purpose. This document may not be distributed to the US, Canada or Australia or any other jurisdiction where its distribution is unlawful.
Hong Kong
In Hong Kong, this document is distributed by HBAP to its customers for general reference only. HBAP is not responsible for any loss, damage or other consequences of any kind that you may incur or suffer as a result of, arising from or relating to your use or reliance of this document. HBAP gives no guarantee, representation or warranty as to the accuracy, timeliness or completeness of this document.
Miscellaneous
Notwithstanding this document is not investment advice, please be aware of the following for the sake of completeness. Past performance is not an indication of future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. When an investment is denominated in a currency other than the local currency of an investor, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. Where there is no recognised market for an investment, it may be difficult for an investor to sell the investment or to obtain reliable information about its value or the extent of the risk associated with it.
This document contains forward-looking statements which are, by their nature, subject to significant risks and uncertainties. Such statements are projections, do not represent any one investment and are used for illustration purpose only. Customers are reminded that there can be no assurance that economic conditions described herein will remain in the future. Actual results may differ materially from the forecasts/estimates. No assurance is given that those expectations reflected in those forward-looking statements will prove to have been correct or come to fruition, and you are cautioned not to place undue reliance on such statements. No obligation is undertaken to publicly update or revise any forward-looking statements contained in this document or any other related document whether as a result of new information, future events or otherwise.
The Hongkong and Shanghai Banking Corporation Limited, its affiliates and associates and their respective officers and/or employees, may have interests in any products referred to in this document by acting in various roles including as distributor, holder of principal positions, adviser or lender. The Hongkong and Shanghai Banking Corporation Limited, its affiliates and associates, and their respective officers and employees, may receive fees, brokerage or commissions for acting in those capacities. In addition, The Hongkong and Shanghai Banking Corporation Limited, its affiliates and associates, and their respective officers and/or employees, may buy or sell products as principal or agent and may effect transactions which are not consistent with the information set out in this document.
© Copyright 2021. The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED. No part of this document may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited.
HSBC
HSBC