FX Matters January 2021 | Article – HSBC VisionGo

January highlights

Finance  ·    ·  15 mins read

What you may have missed last month

  • Joe Biden sworn in as President of the United States
  • USD bears bitten as rising US Treasury yields help the USD
  • Fed Chair Powell says “premature” to talk of tapering asset

Summary – The USD bounces back… a bit

2021 launched with a rather mundane start for FX markets, with the US Dollar Index (DXY)rising 0.7%*1 and no G10 currency moving by more than 2%. This was despite a raft of news which would usually be expected to catalyse a wave of ‘risk on’ sentiment including additional fiscal stimulus talk from Joe Biden, the Democrats having majorities in both the House and theSenate, and a Federal Reserve (Fed) continuing to bang the drum of loose monetary policy. Furthermore, the market remained very much in a ‘Risk On-Risk Off’ (RORO) environment. In particular, market participants focussed on the progress of the vaccine rollout, additional stimulus, and tighter COVID-19 restrictions around the world.

The EUR fell 0.7% in January, starting the year on the back foot despite the end-2020consensus view that 2021 would be a year of weakness for the USD. That said, the EUR started the month well and climbed in the first few sessions as risk sentiment remained largely positive and EUR-USD climbed to a multi-year high of 1.235 intraday on 6 January. These initial gains were quickly relinquished, however, and the EUR failed to climb back to its highs. The European Central Bank (ECB) meeting on 21 January brought no surprises, with the central bank maintaining its policy rate and affirming the EUR1.85trn of pandemic emergency purchase programme (PEPP)*2 currently announced. Into the end of the month, the EUR dropped further on moderating risk sentiment and increasing attempts by the ECB to talk down the euro from further strength.

The GBP rose 0.3% in January and was carried higher on the back of positive global risk sentiment and more vaccine optimism. On 4 January it was announced that England would enter a third national lockdown, and GBP fell 0.7% against the USD on the day. However, as the month wore on, the UK developed a significant lead over many other developed nations in the proportion of population which was vaccinated, potentially explaining GBP outperformance in January.

Elsewhere: Oil prices jump

Brent crude oil prices rose 7.9% in January, with most of the gains arising in the first half of the month on the back of Saudi Arabia announcing it would voluntarily cut production by 1m barrels per day in February and March compared to January levels. West Texas Intermediate (WTI) crude oil prices also crossed the threshold of USD50 per barrel for the first time since February 2020.

US: A modicum of strength

The US Dollar Index (DXY) climbed 0.7% in January for its first monthly gain since October. The USD strength came, despite the Democrats winning in both runoff races in Georgia on 6 January, which was expected to be a ‘risk on’ event given its implications for additional fiscal stimulus in the US. Nonetheless, with S&P500 Index declining in January, the strength of the USD fitted the broader ‘Risk On-Risk Off’ (RORO) backdrop.

January was a busy month politically, although the USD was unruffled by domestic developments on this front. On 6 January, alongside the Democratic win in Georgia, pro-Trump supporters attacked and breached the Capitol building, which temporarily halted the counting of electoral college votes for Joe Biden. Nonetheless, despite this, the DXY ended the day up a measly 0.1%. On 13 January, President Trump was impeached for an historic second time, and Joe Biden was sworn in as US President on 20 January. Yet market participants seemed unperturbed by events in Washington, and looked ahead to the continuing vaccine rollout around the world.

On the data front, non-farm payrolls came in worse than expected with a fall of 140k, compared to consensus for an increase of 50k. US retail sales also disappointed, with a monthly fall of 0.7% in December. Industrial production data for December, however, outperformed with a rise of 1.6% over the previous month compared to consensus for a rise of 0.5%. 

January saw some talk of tapering asset purchases from Federal Reserve (Fed) officials. This likely helped the DXY climb alongside a similar rise in US Treasury yields early in the month. Nonetheless, on 14 January, Fed Chair Jerome Powell stated it was “too soon” to consider any exit of Federal Reserve support for the economy. The fiscal side seemed to affirm this stance, with President-elect Biden announcing a USD1.9trn stimulus package on the same day. Overall, the DXY fell 0.1% on the day. Also in focus was incoming Treasury Secretary Janet Yellen’s testimony before the Senate on 19 January, in which she stated the importance of stimulus and the need to “act big”. Yellen also stated the value of the USD should be determined by the market. On 27 January, the Fed left both rates and its QE programme unchanged and Powell stated that upcoming inflation is likely to be “transient” and that talk of tapering is “premature”. Despite the dovish stance, ‘risk-off’ sentiment swept through markets on the day, with the S&P 500 Index falling 2.6%, and the DXY rising 0.5%..

Eurozone: Talk is cheap

It was a relatively bland month for the EUR and the currency fell 0.7% against the USD. That said, the EUR kicked off the month stronger – climbing in its first three sessions as largely positive risk sentiment helped the currency to outperform. On 6 January, the confirmation that the Democrats having majorities in both the House and Senate likely also buoyed the EUR on ‘risk on’ sentiment. The EUR climbed to its highest level in almost three years to 1.235 against the USD on 6 January. Thereafter, the EUR relinquished gains, and fell back down to 1.205 later in the month.

The economic picture in the Eurozone was bleak throughout January, with many nations announcing additional lockdown restrictions and those which already had tighter measures announcing they would continue further into the future. On 7 January, retail sales showed a fall of 6.1% over the previous month in November, which was significantly worse than consensus for a fall of 3.4%. The EUR fell 0.4% against the USD on the day.

The European Central Bank (ECB) meeting on 21 January was largely a non-event, with the central bank reaffirming its current target of EUR1.85trn under the pandemic emergency purchase programme (PEPP) and making no change to its policy rates. Whilst the ECB expressed concern about the currency strength, the EUR expressed no concern about the ECB, and rose 0.5% on the day. On 26 January, the ECB announced it was studying if differences between its policy and the Federal Reserve’s (Fed) were affecting the EUR, but this had but a transitory effect on EUR-USD, and the pair ended the day up 0.2%. Thereafter, the ECB continued to try to talk down the euro and on 27 January the ECB’s governing council member Klaas Knot said they had the tools to counter euro appreciation “if needed”. Knot also stated the ECB was yet to reach the lower bound, and there was room for another rate cut if needed. EUR-USD fell 0.4% on the day alongside ‘risk off’ sentiment and a dovish Fed.

UK: Lockdown 3.0 but still the outperformer

The GBP strengthened by 0.3% in January against the USD. The year began poorly for the GBP, which fell 0.7% on 4 January, as the UK government announced another lockdown that would last until at least the middle of February. As the month wore on, the GBP managed to pare losses, but not without oscillating against the USD as it was pulled in different directions. On 12 January, GBP-USD had its best one-day performance of January, climbing 1.1% as Bank of England (BOE) Governor, Andrew Bailey, stated there were a lot of issues with negative rates. Yet, on 20 January, Governor Bailey mentioned that negative interest rates remained a possible option.

The GBP also saw little support from domestic data, with industrial production, manufacturing production, and retail sales for November all lower than expected, although the unemployment rate in the three months to the end of November was better than expected at 5% against consensus of 5.1%. More attention appeared to be paid instead to the fast pace of vaccine rollout in the UK with the nation vaccinating over 8 million people by the end of the month.

Japan: Rising US yields hurt the JPY

The JPY fell 1.3% against the USD in January alongside rising US Treasury yields. It was a rough start to the month for the currency and its worst one-day performance came on 7 January, where USD-JPY rose 0.7%, together with a 10-year US Treasury yield which continued its rise above 1% on the day.

Whilst the JPY continued to be dominated by global factors, there was some positivity in the domestic economy. On 13 January, core machine orders for November surprised significantly to the upside with an increase of 1.5% over the previous month, compared to an expected decrease of 6.5%. Retail sales data, however, showed a monthly decrease of 0.8% in December. Furthermore, on 21 January, the Bank of Japan (BOJ) announced it was holding its policy rate flat but BOJ Governor Kuroda expressed the importance of keeping the whole yield curve low after the pandemic has ended. The JPY finished essentially flat on the day.

China: Quick off the line

The CNY rose 1.5% against the USD in January, although most of the gain was attributable to the first trading session of the year, where the CNY rose 1% against the USD. The sizeable move meant USD-CNY fell below 6.50 for the first time since 2018 and was likely prompted by broader USD selling. Thereafter, the CNY pared some gains but largely remained range-bound and moved with wider moves in the USD.

On the data front, China GDP data for 4Q released on 18 January showed an increase of 6.5% on a year-on-year basis, above consensus expectations of 6.2%. Despite the better-than expected data, the CNY fell 0.2% against the USD on the day. Industrial production data released on the same day for December also outperformed, rising 7.3% over the same period last year. Retail sales disappointed market expectations, rising 4.6% over the same period last year. Toward the end of the month, on 28 January, monetary conditions tightened, as the People’s Bank of China (PBOC) drained CNY150bn via reverse repurchase agreement transactions *3. The CNY rose 0.5% against the USD on the day.

Canada: Swinging from highs to lows

The CAD ended January down 0.3% against the USD, but this belied the volatility of the past month. In fact, USD-CAD largely oscillated between 1.26 and 1.28. The CAD had its best one-day performance against the USD on 5 January where it rose 0.8% in line with positive global risk sentiment. Thereafter, conditions became much choppier and USD-CAD spiked above 1.28 on an intraday basis on 11 January, as rising US Treasury yields and negative risk sentiment weighed on the CAD. Into the end of the month, the CAD weakened further against the USD as sentiment turned sour. In the domestic economy, employment data released on 8 January was mixed with a worse-than-expected decline in employment in December, but a lower-than expected unemployment rate. Retail sales data was better than expected, rising 1.3% over the previous month in November, and GDP data for the same month came in at 0.7%, above consensus of 0.4%.

Australia: A mixed bag

The AUD fell 0.6% against the USD in January. The AUD started the month on the front foot, climbing 1.2% against the USD on 5 January as the USD slumped on positive risk appetite. The AUD was also likely helped higher by rising commodity prices. That said, the AUD struggled to hold onto its early gains and dropped 1% on 15 January as risk appetite weakened on concerns that further stimulus measures may struggle to gain widespread support. Economic data was mixed in January as employment data showed an additional 50k jobs added and a fall in the unemployment rate to 6.6%. However, December retail sales data released on 22 January showed a 4.2% decline over the previous month and the AUD fell 0.6% against the USD on the day.

New Zealand: Roller coaster ride

The NZD oscillated through January but ended the month up against the USD, rising 0.1%. The NZD had a strong start to the year like many of its peers in G10, rising 1.1% on 5 January and a further 0.6% on 6 January as vaccine optimism and stimulus hopes boosted risk sentiment as the Democrats secured a clean sweep by winning both Senate runoff races in Georgia. However, the gains were slightly whittled away thereafter, and the currency had its worst day of the month on 11 January, falling 1.1% against the USD. Furthermore, on 21 January, CPI for 4Q showed a 1.4% increase over the same period last year, which was higher than consensus for 1.1%, and likely helped reduce expectations for a further rate cut by the Reserve Bank of New Zealand (RBNZ) later in the year; the NZD rose 0.6% on the day.

Norway and Sweden: Like chalk and cheese

The SEK finished down 1.6% against the USD and was the worst G10 performer against the USD. The SEK had its worst one-day performance on 13 January when the Riksbank announced that it will no longer rely on foreign borrowing to finance currency reserves – leading to approximately SEK60bn of outflows a year (Bloomberg 13 January). While the Riksbank said the move was not to affect the currency but rather to rely less on foreign borrowing, the SEK still fell 1.2% against the USD on the day for its worse one-day performance of the month. That said, in the second half of the month the SEK did pare losses, rising on the back of broader USD weakness.

The NOK jumped higher and lower throughout January but ended the month up 0.3% against the USD, the second best G10 performer for the month. The currency was primarily driven by oscillating risk sentiment regarding vaccines, stimulus, and the possibility of Fed tapering. The NOK had its worst one-day performance on 11 January and fell 1.3% alongside broader USD weakness, but quickly recovered losses on 12 January with its best one-day performance, rising 1.1% against the USD. On 21 January, the NOK rose 1.1% as Norges Bank announcement contained more hawkish rhetoric amid rising inflation and a faster-than-expected vaccine rollout. Into the end of the month, the NOK suffered some selling pressure as the USD resurged on deteriorating risk appetite, with the NOK falling 1.2% against the USD on 27 January for example. However, on 29 January, Norges Bank announced a significantly higher-than expected daily NOK purchase rate of NOK1,700m a day and the currency jumped 0.5% against the USD, allowing it to post a positive performance against the USD to start the year.

Oil: From strength to strength

Oil continued its climb higher in January, with Brent crude oil prices finishing up 7.9% over the course of the month. The month started with oil on the front foot as prices rose 4.9% on 5 January and hit a 10 month high as Saudi Arabia pledged to cut an extra 1 million barrels of crude output per day in February and March compared to January levels. West Texas Intermediate (WTI) crude oil prices also crossed the threshold of USD50 per barrel for the first time since February 2020. Thereafter, oil climbed higher into the middle of the month, with Brent crude oil prices briefly climbing above USD57 per barrel on 13 January as vaccine optimism, talks of further stimulus and the Saudi production cuts helped support prices. Thereafter, crude oil prices dropped somewhat and then traded sideways through the rest of the month, primarily rotating with changes in risk sentiment. Brent crude oil prices had their worst day of the month on 15 January alongside news of additional Chinese cities moving into lockdowns; Brent crude oil prices fell 2.3% on the day. Nonetheless, oil prices ultimately recovered and were buoyed by risk sentiment and vaccine optimism throughout the month.

Precious metals: Rising yields and talk of tapering weigh on gold

Gold fell 2.7% in January as rising US Treasury yields reduced the incentive to hold gold. That said, gold prices had a relatively buoyant first few days of 2021, rising 2.3% on 4 January alongside a weaker USD and the belief that rates would remain lower for longer. However, gains were relinquished on 6 January as gold fell with rising US Treasury yields proving a headwind for the precious metal. On 8 January, talk of possible Fed tapering and US Treasury yields which continued to rise, prompted gold to fall 3.4% for its worst day of the month.

In the second half of the month, gold managed to stage something of a comeback as Fed Chair Powell essentially ended the tapering conversation by saying it was not the time for the Fed to “exit”. Through all of January, gold continued to have a high negative correlation with movements in the USD. Consequently, gold gained as US Incoming Treasury Secretary Janet Yellen stated that the administration would support a market-determined value for the USD, which in turn buoyed prices. Into the end of the month, gold came under some selling pressure as the USD strengthened, and closed the month with a level of USD1848 per ounce.

*1 This report uses Bloomberg prices
*2 PEPP, a temporary asset purchase programme of private and public sector securities, is a non-standard monetary policy measure initiated in March 2020 to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the coronavirus (COVID-19) outbreak.
*3 The PBOC uses repurchase agreements (repos) and reverse repurchase agreements (reverse repos), in order to provide stability in short-term lending markets through open market operations (OMO).

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