FX Matters June 2021 | Article – HSBC VisionGo
- US Federal Open Markets Committee (FOMC) ‘median dot’ shows two 25bp rate hikes by end-2023
- Reserve Bank of Australia states rate hikes are unlikely until 2024 at the earliest
- European Central Bank holds rates and pace of purchase programme
Summary – Fed takes the stage
The USD was the G10 outperformer in June, with the US Dollar Index (DXY) rising 2.9% over the course of the month. The first half of the month saw the DXY trading in a mostly subdued manner as markets waited for the 16 June Federal Open Market Committee (FOMC) meeting. On 16 June, the Federal Reserve (Fed) held rates, but the central bank was more hawkish than expected with its median projection for the first rate hike brought forward into 2023. The DXY rose 0.7%. Thereafter, the DXY was driven by comments from various Fed speakers, and on the last day of June, surged 0.4% on better-than-expected labour market data.
The EUR fell 3% against the USD. The European Central Bank (ECB) meeting on 10 June was largely a non-event, with EUR-USD moving just 0.1% lower on the day as the dovish policy stance of the ECB was already discounted by markets. That said, the EUR saw its worst one-day performance of the month on 16 June as it was dragged 1.1% down against the dollar in the aftermath of the FOMC meeting. Although the EUR recovered slightly towards the end of the month, the currency still remained one of the G10 underperformers in June.
GBP retreated 2.7% against the USD. Although the first half of the month saw GBP challenging 1.42 on multiple occasions, the currency failed to advance beyond this level. GBP was first battered by a stronger USD on the back of a more hawkish-than-expected Fed on 16 June, and slipped again on 24 June as the Bank of England (BoE) kept rates on hold and mostly voted to maintain the current asset purchase target. The failure of any more policy makers to vote with the hawkish Chief Economist Andy Haldane at his last BoE meeting was the key downward catalyst for GBP. That said, GBP was able to pare losses and fared comparatively better than most other G10 currencies this month.
Elsewhere: All that glitters is not gold
June was a difficult month for gold, which fell 7.2%. The start of the month saw gold fall on better-than-expected US economic data and hints of taper talk, and the more hawkish than expected Fed on 16 June took its toll on the precious metal with gold ending the day down 2.6%. Towards the end of the month, gold was unable to stage a comeback and eventually closed June at around USD1,770 per ounce. Conversely, Brent coasted through June with an almost single-minded upwards climb, with prices rising 8.4%.
On 1 June, Brent broke past the key USD70 per barrel level, likely due to improving demand cited by OPEC+, and clambered higher over the course of the month. While a stronger USD led Brent prices to fall 1.8% on 17 June, this was but a minor setback, and Brent rose 1.9% on 21 June. This was likely due to a softer USD and news that talks to end Iranian crude sanctions had paused (Reuters, 21 June 2021). Brent eventually ended the month at USD75.13 per barrel, its highest level since 2018.
USD: Driven by the Fed
The DXY rallied in June, rising 2.9% in a performance that was mostly fuelled by the Fed. In the first half of the month, the broad dollar moved in a relatively subdued manner as markets likely waited for the FOMC meeting. That said, when the DXY did make notable moves, it was generally around economic data that could shed some light on the Fed’s decision. For instance, the DXY rose 0.7% on 3 June as initial jobless claims turned out better than expected – but slid 0.4% the next day as US Nonfarm Payrolls disappointed with an increase of 559k jobs against the consensus of a 675k gain.
On 16 June, the Fed held the target range at 0-0.25%, but the FOMC median dot, which projected two rate hikes in 2023, and comments by the Fed Chair Jerome Powell suggested that the Fed was more hawkish than the markets. During the press conference, Fed Chair Powell stated that while “substantial further progress” had yet to be met, the economy has “clearly made progress”, inflation expectations are “at a good place”, and the FOMC had begun tapering discussions. The DXY ended up 0.7% on the day.
For the rest of the month, the DXY gyrated in line with sentiments expressed by a host of Fed speakers. On 18 June, James Bullard, a non-voting member of the FOMC, said that he saw rate hikes starting in late 2022; the DXY gained 0.4% on the day. Conversely, on 22 June, John Williams, a voting member, expressed his view that rate hikes were still “way off in the future”, and Fed Chair Powell stated that the Fed would not raise rates pre-emptively. The DXY fell 0.2% that day.
Just as the rhetoric from different Fed speakers was mixed, so was the economic data in the US. May advance retail sales fell 1.3% against an expected decrease of 0.8%, but personal income data for May surprised on the upside at -2% month-on-month relative to the consensus of -2.5%. On the last day of the month, a better-than-expected ADP employment change gave DXY a final boost, with DXY rising 0.4% on the day.
Eurozone: Dragged down by the dollar
The EUR found itself dragged down by the dollar in June, with EUR falling 3% against the USD. The month started with the currency trading mostly sideways and fluctuating in line with US data. On 10 June, the ECB held rates and maintained a significantly higher rate of asset purchases for another quarter. During the press conference, ECB President Christine Lagarde acknowledged there was now a better economic outlook – leading the central bank to revise GDP growth to 4.6% this year, up from the previous forecast of 4% – but emphasised that the ECB is still “far away” from their ultimate aim and thus had to keep a “steady hand” on policy for now. However, as markets likely expected this policy response from the ECB, EUR-USD barely budged on the day.
That said, while the EUR was mostly unmoved on the ECB meeting, it was far from impervious to the impact of the FOMC meeting. With broader USD strength on the back of a more hawkish-than-expected Fed, the EUR saw its worst one-day performance on 16 June – plunging 1.1% on the day – and EUR-USD continued to be dragged down over the next few days. The EUR struggled to pare its losses into the month-end, making little headway as the USD surged on hawkish rhetoric whilst the EUR was faced with dovish comments by various ECB speakers. For instance, on 21 June, President Lagarde mentioned that the ECB still had the capacity to cut rates if needed. Just a day later, ECB member Peter Kazimir stated that there was no reason for the ECB to change its monetary policy at the moment.
On the data front, the economic backdrop was generally mixed in the Eurozone. April retail sales fell 3.1% month-on-month against an expected decrease of 1.5%, but industrial production data for the same month showed a 0.8% gain, higher than the consensus of a 0.4% rise. Sentiment remained fairly strong, with the Markit Eurozone Composite PMI registering a print of 59.2, a further improvement from the prior month’s 57.1.
UK: Lone hawk flies the nest
Despite a relatively resilient performance at the start of the month, GBP lost its drive midway through, with GBP-USD falling 2.7%. The first half of the month saw GBP challenging 1.42 on multiple occasions, but the air above 1.42 proved thin, and GBP failed to advance beyond this level. On 15 June, Prime Minister Boris Johnson announced a delay to the UK’s planned reopening, citing the risks posed by the COVID-19 Delta variant, but GBP-USD only fell 0.2% on the day as the markets likely turned their attention to the FOMC meeting the next day.
On 16 June, the Fed turned out to be more hawkish than expected and GBP-USD faltered on the day, slipping 0.7%. Over the next few days, broader USD strength on the back of some hawkish commentary from various Fed speakers meant GBP-USD gradually drifted lower. That being said, the currency pair eventually managed to find some reprieve as markets turned their attention to the 24 June BoE meeting. Much of the talk centred around whether Chief Economist Andy Haldane might be able to persuade other members of the Monetary Policy Committee (MPC) to vote for a reduction in the asset purchase target in what was his last meeting in the role.
However, on 24 June the BoE kept rates on hold at 0.1%, and Haldane was alone in voting for a reduction in the asset purchase programme. The continued dovish stance of the other MPC members led to a knee-jerk decline of 0.5% in GBP-USD, although GBP eventually ended the day down 0.3% against the USD. In its statement, the BoE reiterated its beliefs that inflation remains transitory, and it would be “wrong to undermine recovery with premature tightening”. That being said, the BoE did see a reduction in downside economic risks, and revised their growth expectations to 5.5% quarter-on-quarter in 2Q, up from 4.25% in the previous month.
Despite the upbeat revision by the BoE, economic data was generally worse than expected. April industrial production fell 1.3% month-on-month against the consensus of a 1.2% rise, and April manufacturing production also declined 0.3% month-on-month against an expected increase of 1.5%. Although the UK economy had largely reopened in May, retail sales data were poor, falling 1.4% month-on-month compared to the consensus expectation of a 1.5% gain.
Japan: Second best or first placed loser?
Despite the JPY being the second best performer in G10, broader USD strength meant the JPY still fell 1.4% against the USD over the course of the month. This was despite the fall in US 10-year yields through the month, which suggested JPY resilience was more a function of weaker risk sentiment in FX than rates movements. The JPY had its best one-day performance at the start of the month on 4 June, where a miss in US Nonfarm Payrolls led the JPY to gain 0.7% against the USD, but declined thereafter for the rest of June.
On 18 June, the Bank of Japan (BoJ) kept its policy rates on hold at -0.10%, maintained the yield target around 0%, and kept asset purchases unchanged. While the BoJ chose to extend some financing programmes by six months to the end of March 2022 to support firms, Governor Kuroda also stated that the economic outlook was improving alongside a faster-than-expected vaccination rollout in Japan. The USD-JPY stayed flat on the day.
The domestic picture was generally mixed. 1Q GDP fell 1% quarter-on-quarter against consensus of a 1.2% decrease, but core machine orders for the same month were worse than expected, with a 0.6% rise month-on-month compared to the expectation of a 2.5% increase. That said, the JPY was seemingly unmoved by domestic data as usual, with USD-JPY swayed more by US-centric events.
Mainland China: A round trip home
June saw the CNY erase almost all of its May gains to make a round trip back above 6.46. The month saw an almost continuous weakening of the CNY against the USD as various economic data disappointed expectations. May exports rose 27.9% year compared to the consensus of 32.1%, and retail sales for the same month increased 12.4% year-on-year compared to an expected rise of 14%. The CNY’s decline accelerated in the second half of the month, with a more hawkish-than-expected Fed likely contributing to a 0.8% fall in the CNY against the USD on 17 June. The combination of softer-than-expected economic data and a more hawkish Fed likely contributed to the CNY’s overall lacklustre performance against the USD this month.
Canada: Not a sweet experience
The CAD fell 2.7% against the USD in June. On 9 June, the Bank of Canada (BoC) kept rates on hold and maintained its current pace of asset purchases, with the central bank stating that the economic recovery still required “extraordinary” monetary policy support; USD-CAD stayed flat. The CAD weakened marginally closer to 16 June as markets likely waited for the FOMC meeting, but when the Fed turned out to be more hawkish than expected, the CAD fell 0.7% against the USD on the day. That being said, it managed to gain some respite and ended June comparatively better than some of its G10 peers. Economic data were generally worse than expected. Annualised quarterly GDP showed a rise of 5.6% compared to an expected 6.8%, and labour market data also disappointed, with net change in employment falling by 68k against an expected decline of 25k in May.
Australia: Lower on the month
The AUD was down 3.1% against the USD in June. The first day of June saw the Reserve Bank of Australia (RBA) announcing its decision to keep rates and its 3-year yield target on hold, with the statement reiterating that conditions for a rate hike – inflation and wage growth – are unlikely to be in place “until 2024 at the earliest”. Despite the dovish statement, AUD-USD was up 0.3% on that day, possibly due to better-than-expected economic data which showed 1Q GDP rising 1.8% quarter-on-quarter. The AUD traded mostly sideways for the first half of the month, but it was not spared after the FOMC meeting, and the currency weakened 1% against the USD on 16 June. On 28 June, as news broke that Australia was imposing a new set of restrictions to curb the spread of the COVID-19 Delta variant, the AUD slid further, ending 0.3% down on the day. That being said, the AUD’s decline against the USD was less marked than the NZD and it was also able to pare back some of its losses towards the end of the month, leaving the currency relatively unscathed compared to the NZD.
New Zealand: The underperformer
The NZD was the G10 underperformer in June, with NZD-USD falling 4% over the course of the month. The month started with the NZD on the back foot, with the currency seeing its worst one-day performance on 3 June on the back of better-than-expected US initial jobless claims data; NZD-USD fell 1.3% that day. The first half of June saw the NZD slowly but surely sliding against the USD, but after the FOMC meeting on 16 June, NZD-USD plummeted, reaching a year-to-date low of 0.6923 on 18 June. The NZD recovered towards the end of the month, but it was not enough to make up for the steep decline seen after the FOMC meeting. In terms of domestic data, New Zealand’s economy still appears to be firing on all cylinders with 1Q GDP rising 1.6% quarter-on-quarter, beating expectations of a 0.5% increase.
Norway and Sweden: Falling behind
The SEK fell 3% against the USD this month. The currency’s worst one-day performance was on 16 June, as a more hawkish-than-expected Fed led the SEK to fall 1.6% on the day against the dollar. On the data front, the economic picture in Sweden generally underwhelmed. April industrial orders fell 2.5% month-on-month, a deterioration from the prior month, and May CPI was also weaker at 0.2% month-on-month versus an expected 0.4% rise. The NOK slumped 3.3% against the USD in June on the back of broader USD strength, with EUR-NOK largely stable. On 17 June, the Norges Bank held rates, but signalled that it would raise its policy rate at its September meeting. The central bank also raised its rate profile, and now projects around four 25bp rate hikes by end 2022. While the NOK initially spiked on the announcement, it was unable to compete with the stronger USD and the NOK fell 0.8% on the day against the USD. Economic data remained optimistic, with May retail sales rising 5.8% month-on-month compared to the prior increase of 0.3%.
Oil: Up, up and away
June saw a strong rally in Brent, with prices climbing 8.4%. On 1 June, Brent managed to reclaim the USD70 per barrel level that slipped from its grasp in the prior month. This was likely due to a picture of improving demand painted by OPEC+, which decided to increase supply as previously agreed; Brent prices were up 1.3% on the day. Throughout the rest of June, Brent continued to march higher, with prices faltering in only five trading sessions during the entire month. Of those, Brent slipped 1.8% on 17 June as a stronger USD curtailed oil prices, although it quickly recovered its footing on 21 June with a 1.9% gain on news that talks to end US sanctions on Iranian crude had paused (Reuters, 21 June 2021). Brent’s impressive advance was somewhat waylaid on 28 June over concerns of renewed COVID-19 restrictions in Asia, with prices falling 2% on the day. Nonetheless, this was a minor blip for Brent, which ended the month at USD75.13 per barrel, its highest since 2018.
Gold: No golden opportunities
Gold languished in June, falling 7.2% alongside a more hawkish-than-expected Fed and a stronger USD. The precious metal started June poorly with a 2% drop on 3 June. This was likely due to better-than-expected US initial jobless claims data and hints of taper talk from the dovish FOMC member John Williams, who stated that while the economy is still quite a way off from reaching substantial further progress, the Fed has to be “thinking through the various options” for the future. Despite the hefty fall, this was not the worst one-day performance for gold during the month, which came on 16 June. The FOMC meeting not only implied two 25bp rate hikes, but also renewed talk around possible tapering by the Fed. These weighed on gold, with the metal tumbling up to 3.2% in intraday trading after the FOMC meeting, before reversing some of its gains to end the day down 2.6%. The mix of hawkish and dovish speakers in the following days led gold prices to oscillate without clear direction into the end of the month, and gold closed at around USD1,770 per ounce.
 This report uses Bloomberg prices.
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