FX Matters February 2021 | Article – HSBC VisionGo
What you may have missed last month
- The USD strengthens, but mixed month as RORO becomes less dominant
- A rising 10-year US Treasury yield prompts a back and forth dynamic in the FX market
- The Federal Reserve (Fed) Chair Powell says the Fed is a “long way” from its goal of full employment
Summary – Risk versus rates
The US Dollar Index (DXY) ended February slightly stronger, up 0.3%*, as a battle between the current dominance of ‘Risk Off - Risk On’ (RORO) and a rising 10-year US Treasury yield prompted a back and forth dynamic in the FX market. The DXY had a strong start to the month, rising over 1% during the first four trading days; this marked a change from the pure RORO dynamic as the S&P500 Index rose 4% higher over the same period. However, following a disappointing US Non-farm payrolls report on 5 February, the DXY pared gains, falling 0.6%, and further falls in the following days eliminated gains completely. A surge in 10-year US Treasury yields on 17 February carried the USD temporarily higher, and higher US yields continued to keep the USD elevated into the month end. Looking across the whole month though, RORO was not stymied so easily, and with equity markets relinquishing some gains at the end of the month, the DXY clawed back to a monthly gain.
The EUR finished February down 0.5% against the USD, but this benign end result belied the price action of the month, with the EUR briefly falling below 1.20 as US Treasury yields prompted a bout of USD strength. The comparatively slow vaccine rollout in Europe also likely weighed on investor sentiment, but as the vaccine programme ramped up, this likely became less of a concern. The EUR gained 0.7% against the USD on 5 February and did not retest its lows thereafter, but heavy selling at the back end of the month on rising US Treasury yields and falling equity markets prompted renewed selling, and the EUR ended the month down.
The GBP outperformed in February, climbing 1.6% against the USD as positive risk sentiment and increasing optimism regarding the vaccine rollout in the UK likely supported the currency. In fact, the GBP fell against the USD on only six trading days in February, demonstrating the relentless nature of the appreciation. Comments from the Bank of England (BOE) likely also supported the GBP, with BOE Governor Bailey stating there would be no immediate rollout of negative rates, thus reducing expectations for further rate cuts and easing. The GBP crossed above 1.40 against the USD for the first time since April 2018, but a return of risk-off sentiment on the last two days of the month prompted the GBP to fall back toward 1.39.
Elsewhere: Deep freeze in Texas helps prices climb
Oil prices surged in February, with Brent prices rising 18.3% over the course of the month on the back of a market that appeared increasingly tight. In the middle of the month, extreme cold weather in Texas and much of the US shut down a significant portion of production. Even with production resuming later in the month, crude prices continued to rise, with Brent and WTI ending the month at USD66 per barrel and USD62 per barrel, respectively, the highest levels since January 2020.
US: Surging yields prompt an identity crisis for the USD
The US Dollar Index (DXY) rose a modest 0.3% in February. This relatively lacklustre performance, however, did not reflect the true swings of the market in February. In the first few trading sessions and the last few days of the month, the USD climbed alongside US Treasury yields. On 1 February, the DXY rose 0.4% alongside a 1.6% increase in the S&P500 Index, an early sign that RORO dominance over FX markets was becoming less relevant. Despite a strong start to the month, the USD soon relinquished these gains, falling 0.5% on 5 February following weaker-than-expected payrolls data and a further 0.5% on 9 February. Rising US Treasury yields through the middle of the month helped the USD to temporarily climb higher, with the DXY rising 0.5% on 17 February after a better retail sales print. As equities regained their poise, there was renewed USD selling pressure, but this flipped again into the very end of the month as US Treasury yields spiked rapidly higher on 24-25 February.
Economic data showed a mixed picture throughout February. On 5 February, non-farm payrolls came in worse than expected with a rise in January payrolls of 49k compared to the consensus estimate of 105k. That said, the unemployment rate fell to 6.3% from 6.7% in the previous month, and the DXY fell 0.5% on the day. Retail sales data released on 17 February was much more optimistic, rising 5.3% over the previous month in January for its biggest monthly gain since June.
With rising long-end US Treasury yields, markets watched the Fed closely in February. On 17 February, the Federal Open Market Committee (FOMC) minutes showed that the Federal Reserve (Fed) officials saw the current pace of bond buying continuing for “some time”. Later, on 23 and 24 February, Fed Chair Powell testified in his report to Congress. While he stated that the economic outlook was improving for later in the year, he continued to emphasise the Fed being a “long way” from its goal of full employment, pointing to the 10 million fewer people employed than this time last year. This didn’t seem to curb the rise in US yields, which spiked sharply higher on 24-25 February.
US President Biden also pushed ahead with his USD1.9trn stimulus plan. On 11 February, House Speaker Pelosi stated that she wanted the stimulus passed no later than the end of the month, regardless of the lack of bipartisan agreement. At the end of February, the House did pass the bill, shifting the focus to the Senate. The vaccine campaign ramped up rapidly in the US, and by the end of the month an average rate of 1.7 million doses was administered per day (Bloomberg, 28 February).
Eurozone: Falling in February
The EUR ended February down 0.5% against the USD. This relatively benign change, however, belied the price action underneath. The month started with the EUR on the back foot, falling 0.6% on 1 February, and then falling further in the following sessions to drop below 1.20 for the first time since November 2020. The move was likely partly attributable to rising US Treasury yields, and a comparatively slow vaccine rollout in Europe, which may have raised concerns about the pace of any European economic rebound.
That said, the EUR quickly pared losses and rose 0.7% against the USD on 5 February as risk-on currencies outperformed. The EUR climbed a further 0.6% on 9 February. The currency traded relatively sideways thereafter, dropping temporarily in the middle of the month, but then rebounding like many of its G10 counterparts. Over the last few days of February, EUR-USD climbed another leg higher, and crossed back above the 1.22 level, despite comments from some European Central Bank (ECB) members such as President Lagarde and Philip Lane that the central bank is “closely monitoring” longer-term bond yields.
European economic data showed the continuing struggle of lockdowns on the continent. On 1 February, German Retail Sales data showed a 9.6% monthly decline for December, the worst number on record. Likewise, French Industrial Production data showed a monthly drop of 0.8% in December, demonstrating that the woes caused by pandemic-induced lockdowns were not isolated to consumers. That said, Eurozone Advance GDP data only fell 0.7% in Q4, lower than the consensus for a fall of 0.9%, perhaps suggesting the economic consequences of lockdowns across the continent were less severe than expected. Into the end of the month, the vaccine programme in Europe did increase significantly in pace, but this did not halt a sharp slide in EUR-USD, which fell 0.9% on 26 February for its worst one-day performance of the month.
UK: Life begins at 1.40?
The GBP strengthened by 1.6% in February against the USD and was the G10 outperformer for the month – briefly crossing above 1.40 against the USD for the first time since April 2018. The GBP differed from other currencies in the G10 space by sustaining its climb higher largely throughout the month. That said, the GBP did come under some selling pressure in the final two days, as US treasury yields surged higher and sentiment became more negative, leading to the GBP having its worst day on 25 February, where it fell 0.9% against the USD. Part of the move higher was possibly linked to the rapid pace of the vaccine rollout in the UK and the hope for a swift return to “normal” levels of economic activity. By the end of the month, the UK had given 31 doses of vaccine per 100 people (Bloomberg, 28 February) and was therefore significantly ahead of many other nations, notably the Eurozone, which continued to suffer from a slow vaccine rollout.
Economic data throughout the month, however, was largely relatively poor. For example, retail sales for January fell 8.2% over the previous month, compared to consensus estimates for a 3% drop, as national lockdowns reduced purchases in the economy. The unemployment rate also ticked higher to 5.1%, its highest level in five years. On 25 February, the UK government announced that 20% of the UK workforce was on the furlough scheme* and half of all businesses were temporarily closed in early February. The GBP did fall quite dramatically thereafter but this was more linked to movements in US yields than to direct concern about the UK data.
On 4 February, the Bank of England (BOE) held the Bank rate at 0.1% and left its QE programme unchanged. BOE Governor Bailey stated that the BOE was still preparing for negative rates, but that the market should draw no signal from the central bank preparations as to future interest rate policy. GBP-USD climbed 0.2% on the day, which was particularly significant given the broader USD strength in the market. Later in the month, the GBP had its best day on 18 February, rising 0.9% against the USD, as Michael Saunders, a member of the Monetary Policy Committee (MPC) at the BOE, said that the scope to further cut interest rates is limited. On 24 February, BOE Governor Bailey stated that there would be limited pandemic scarring to the UK economy, and despite negative comments by other BOE MPC members such as Jonathan Haskel, the GBP rose 0.2% on the day. The strong rise in the GBP through February meant that the GBP was the top G10 performer of 2021 year-to-date, up 4.1% versus the USD.
Japan: Rising US Treasury yields hurt the JPY
The JPY fell 1.7% against the USD in February alongside rising US Treasury yields. Consequently, it was a rough start to the month for the JPY, which fell in its first four trading sessions, and fell 0.5% against the USD on 4 February as broader USD strength prevailed. The JPY did recoup some losses, rising 0.6% against the USD on 9 February as the USD weakened. However, into the end of the month, a surge in US Treasury yields further weighed on the JPY. The currency suffered its worst one-day performance on 16 February, falling 0.6% against the USD as 10-year US Treasury yields jumped over 10bp higher. A few days of broader USD weakness helped the JPY claw back some losses, but another leg higher in long-end US Treasury yields – to over 1.60% for the first time in over a year – prompted the JPY to slump further, with USD-JPY crossing above 106 for the first time since October.
Domestically, Q4 GDP data released on 14 February showed an increase of 3% over the previous month, better than consensus for 2.4%. Industrial production jumped 4.2% over the previous month in January and retail sales data also beat expectations, declining by 0.5% over the previous month in January. While data did surprise to the upside, the picture on a year-on-year basis remained relatively poor, with industrial production and retail sales down 5.3% and 2.4%, respectively. Despite better-than-expected economic data, the Bank of Japan (BOJ) remained relatively dovish, with BOJ Governor Kuroda stating that it was “too early" to discuss an exit strategy from monetary policy stimulus.
China: A slow start to the Year of the Ox
The CNY fell 0.7% against the USD in February. The month began with a sharp depreciation of the CNY by 0.6% against the USD on 1 February as the People’s Bank of China (PBOC) injected liquidity to ease funding stresses. On the same day, the Caixin Manufacturing PMI disappointed market expectations with a print of 51.5 compared to consensus estimates of 52.6, likely adding to the CNY’s woes. Thereafter, moves were much more modest in the run up to the Lunar New Year holidays, with the CNY regaining some ground. After the New Year, the CNY dropped 0.5% on 18 February alongside weak equity market performance. The next day, however, the CNY recovered and had its best one-day performance, rising 0.5% against the USD as the USD weakened more widely. Into the end of the month the CNY relinquished some gains as broad USD strength weighed on the currency.
Canada: Disappointing data of no mind to the CAD
The CAD put on a positive performance in February and finished the month up 0.3% against the USD, and was in the middle of the pack in the G10 space. Economic data in Canada was less positive than in some other regions. For example, on 5 February, the unemployment rate was significantly higher than expected at 9.4%. Despite the poor data, which saw a drop of 213k in the number of people employed, the CAD rose 0.5% on the day on the back of broader USD weakness. On 23 February, the Bank of Canada (BOC) Governor Tiff Macklem stated the central bank would continue to “do its part” in supporting the recovery. As oil prices continued their one-way ascent into the month-end, the CAD posted some further gains, and USD-CAD briefly dropped below 1.25 for the first time since February 2018. However, an end-of-the-month surge in US Treasury yields prompted some sharp CAD selling which wiped out a significant portion of the CAD’s February gains.
Australia: Fell at the final hurdle
The AUD had a strong February rising 0.8% against the USD. The AUD was able to climb alongside rising commodity prices, but aggressive risk-off sentiment and rising US Treasury yields at the end of the month caused the AUD to pare previous gains. On 2 February, the Reserve Bank of Australia (RBA) maintained its cash rate at 0.1% but announced it would buy an added AUD100bn of bonds when its current QE programme concludes, and the AUD fell 0.2% versus the USD on the day. The currency had its best one-day performance on 19 February, rising 1.3% against the USD as a surge in commodity prices likely buoyed sentiment toward risk-on currencies. Australian economic data showed a mixed picture, with retail sales rising 0.6% over the previous month in January and the unemployment rate ticking down slightly to 6.4%.
New Zealand: A 7-day lockdown for Auckland
The NZD climbed 0.6% against the USD in February alongside rising commodity prices. That said, a strong USD at the start of the month meant the NZD struggled out of the starting blocks, but quickly recouped losses. On 24 February, the Reserve Bank of New Zealand (RBNZ) held rates at 0.25% but stressed that “prolonged” monetary stimulus remains necessary to support the recovery. Later that day, the New Zealand government adjusted the RBNZ remit to also take account of housing, perhaps suggesting a more hawkish monetary policy stance could begin at the central bank; NZD-USD rose 1.3% on the day together with broader risk-on sentiment. On 2 February, the unemployment rate came in much better than expected at 4.9% compared to the estimate of 5.6%, NZD-USD rose 0.5% on the day, despite broader USD strength. On 27 February, New Zealand Prime Minister Jacinda Ardern announced a seven-day lockdown for Auckland as a new case of COVID-19 was detected.
Norway and Sweden: Dropping like a stone
The NOK fell 1.3% in February, with most of the drop coming in the final two trading days of the month, where the NOK fell amid rising US Treasury yields. Earlier in the month, the NOK was higher and was likely partly driven by rising commodity prices and building expectations that the Norges Bank will be the first G10 central bank to hike in the G10 space. On 10 February, underlying CPI (the Norges Bank’s preferred measure of inflation) rose 2.7% m-o-m, higher than the estimate for 2.4%. The NOK had its best day on 5 February, rising 1.3%, as the USD weakened and commodity prices pushed higher. Later in the month, however, the NOK dropped like a stone, falling 1.4% and 2% on 25 and 26 February, respectively as US Treasury yields rose and equities plunged.
The SEK fell 0.9% in February, with most of the drop attributable to broader USD strength at month-end. That said, February began poorly for the Scandinavian currency, falling 0.8% against the USD on 1 February. The move was surprising since the S&P500 Index climbed 1.4% on the day, which under the RORO framework would imply strength for risk-on currencies like the SEK. The slump continued on 4 February with a further 0.7% fall against the USD. Thereafter, the currency regained some ground. On 5 February, the SEK had its best one-day performance of the month, rising 1.1% versus the USD as broad USD weakness swept the market. On 10 February, the Riksbank held rates at 0% and Governor Ingves stated they were in “no hurry to make changes” as the uncertainty regarding the pandemic remained large. The SEK ended the day roughly flat against the USD.
Oil: Higher and higher
Brent crude oil prices climbed 18.3% in February and WTI climbed above USD60 per barrel for the first time since January 2020. The month began with a strong performance from Brent, which rose in its first eight trading sessions. Notably, on 8 February, prices climbed 2.1% alongside hopes for prolonged cuts in supply. Later in the month, the continued drive higher was partly driven on the back of optimism over vaccine rollouts but also shocks to supply as snow storms hit much of the US and shut down production and refineries in Texas. While this shutdown was only temporary in nature (with prices falling 1.6% on 19 February as markets digested the reopening) this did not stop prices from rallying further. In fact, Brent prices had their best day of the month on 22 February, rising 3.7%, alongside rising expectations that a tight oil market will lead to higher prices in 2021. Overall, Brent and WTI crude oil prices ended the month up 18.3% and 17.8%, respectively.
Gold: Undermined by rising US Treasury yields
Gold suffered its worst monthly performance since November, falling 6.1% as rising US Treasury yields increased the opportunity cost of holding gold. Gold was hit perpetually throughout the month but suffered its worst one-day decline on 4 February where prices fell 2.2% as the US Dollar Index (DXY) rose 0.4% and the yield curve continued to steepen. With 10y yields rising throughout the month, to a closing level of 1.4% (and briefly climbing above 1.6%), gold came under persistent pressure. Furthermore, over the course of the month, exchange-traded fund (ETF) holdings of gold declined and likely added a further headwind to prices. As the USD pared gains into the end of the month, gold did manage to catch a break, and briefly recovered the level of USD1,800 per ounce, before dropping again on 25 and 26 February as the 10-year US Treasury yield climbed above 1.5%. Gold ended the month at a low of USD1,734 per ounce – the lowest level seen since June 2020.