FX Matters March 2021 | Article – HSBC VisionGo
What you may have missed last month
- US Congress passes USD1.9trn stimulus package
- FOMC holds rates, Powell says “strong bulk of Committee not showing rate hike”
- The USD strengthens 2.6% amid rising US Treasury yields
Summary: Most G10 currencies weren’t “Ever Given” a chance
The US Dollar Index (DXY) ended March stronger, up 2.6%*, as US Treasury yields continued to climb higher over the course of the month, and an increasing shift toward the US exceptionalism theme became apparent in markets as the US vaccination program stormed ahead. On 17 March, the Federal Reserve (Fed) held rates at 0-0.25% and Fed Chair Jerome Powell repeatedly emphasised the dovish message that the Fed would not hike until there was tangible evidence of progress toward its goals. While the Fed raised its US GDP growth forecast for 2021 to 6.5%, Powell stated that the Fed would not act “pre-emptively on forecasts”. Into the end of the month, the DXY continued to gain, as US Treasury yields climbed once more.
The EUR finished March down 2.9% against the USD, as a seemingly continuous plague of vaccination problems derailed hopes for a rapid vaccine rollout. Compared to the UK and US’s vaccine deliveries per 100 people of 51 and 44, respectively, the EU’s 16 seemed meagre (source: Our World in Data, 30 March 2021). Likewise, the European Central Bank’s (ECB) meeting on 11 March offered little reason for EUR strength, and the central bank announced a “substantial” increase in its purchasing pace of bonds over the coming months to try to stem a rise in back-end bond yields. Toward the end of the month, a notable rise in COVID-19 cases prompted renewed lockdowns across much of Europe, and likely added to the EUR’s woes.
The GBP fell 1.1% against the USD in March alongside rising US Treasury yields. Despite a relatively positive vaccine rollout story, which saw average daily vaccinations climb toward 550,000 thousand (7-day average) by the end of the month, the GBP fell as the broader USD backdrop hurt the currency. On the 18 March, the Bank of England (BOE) held rates at 0.1% and left its quantitative easing programme unchanged. However, the meeting minutes showed an increasingly positive assessment of the economy and the BOE did not push back against rising long-end yields as the ECB did, perhaps explaining part of the reason why the GBP ended up 1.3% against the EUR.
Elsewhere: Gold still on the rollercoaster
Gold prices ended March down 1.5%. Despite the modest price action, gold swung aggressively over the course of the month. Gold started March on the back foot, with prices slumping below USD1700 per ounce for the first time since June 2020, against the backdrop of rising US Treasury yields. However, gold prices staged a comeback in the second half of the month, rising as US Treasury yields slowed their ascent and the Fed remained exceptionally dovish. A month-end rise in US Treasury yields prompted a sell-off though, and gold ended the month at USD1708 per ounce.
US: All eyes on the Fed
The US Dollar Index (DXY) strengthened in March, ending the month up 2.6%. The move came alongside a continued rise in longer-dated US Treasury yields, which saw the 10-year yield fleetingly surpass 1.75% on 18 March. The dominance of ‘Risk On-Risk Off’ (RORO) over the USD appeared to wane somewhat over the course of the month, as the USD strengthened despite a 4.2% gain in the S&P500 Index. That said, risk sentiment continued to be an important driver, with the DXY climbing 0.5% alongside a 1.5% fall in the S&P500 Index on 18 March.
All eyes were on the Federal Open Market Committee (FOMC) meeting on 17 March as investors looked to see whether the Federal Reserve (Fed) would move to try and take the wind out of the sails of rising back-end US Treasury yields. However, the Fed seemed unfazed by the rising US Treasury yields, instead believing them to reflect the improving economic situation. The Fed did revise its forecasts for 2021 GDP growth significantly higher to 6.5% compared to a previous estimate of 4.2%. Despite this, the much watched dot plot showed that a majority of FOMC members still see no rate hikes through 2023, and Fed Chair Powell stated that they would not act “pre-emptively on forecasts” and instead wanted to see tangible progress toward their goals. Later in the month, Fed Chair Powell and US Treasury Secretary Yellen testified before US Congress and both emphasised the continuing lengths to go before the US economy had fully recovered, Powell stated that the Fed would not stop until the US had “all but fully recovered”.
On the fiscal policy front, US President Biden signed his USD1.9trn stimulus package into law on 11 March. Despite this significant support package, the administration wasted no time in tentatively talking about the next stimulus package, and proposed a USD3trn infrastructure bill.
Economic data out of the US showed a relatively mixed picture, as non-farm payrolls for February surprised significantly to the upside with a print of 379k compared to estimates for 200k. Fed Chair Powell described the jobs number as good but emphasised they wanted to see “faster gains”. That said, other US data for February came below consensus expectations, such as retail sales (down 3% over previous month) and industrial production (down 2.2% over previous month).
Eurozone: Vaccine woes and rising US Treasury yields pummel the EUR
EUR-USD fell 2.9% in March as another wave of COVID-19 infections swept across the continent and led to the introduction of tougher restrictions once more. Likewise, the vaccine rollout continued to be derailed by delays and disputes in the Eurozone, and this probably added further a further drag to the EUR.
March began poorly for the EUR, which fell in 5 of its first 6 trading sessions, and the currency had its worst one-day performance against the USD on 4 March, falling 0.8% as the USD strengthened broadly on the back of a rise in US 10-year Treasury yields. The EUR fell in the next two sessions for similar reasons. Through the middle of the month, the EUR made something of a comeback, and had its best one-day performance against the USD on 17 March, rising 0.6%. The move came as Fed Chair Powell stressed that a transitory increase in inflation would not warrant a rate hike.
Into the end of the month, however, the EUR resumed its decline, as a rise in COVID-19 cases prompted Germany to announce some of the strictest new lockdown measures on 23 March; EUR-USD fell 0.7% on the day. Although, in a rare U-turn for German Chancellor Merkel, some of these measures were walked back the following day with Merkel admitting she made a “mistake”. Nonetheless, this change could not save the EUR, and EUR-USD fell another 0.3% alongside broader “risk-off” sentiment and a stuck container ship blocking the Suez Canal. On 27 March, Germany’s top court suspended the ratification of the Next Generation EU fund, which could potentially hold up the passage of the bill and distribution of the funds across the continent.
Much like the jam in the Suez Canal, the European Central Bank (ECB) attempted to block yields from rising higher at its meeting on 11 March. The ECB announced that it would increase the pace of its pandemic emergency purchase programme (PEPP)* over the coming months in order to dampen yield movements. ECB President Lagarde also said the ECB will “see through” temporary inflation spikes; EUR-USD rose 0.5% on the day. Economic data for January in the Eurozone was mixed throughout the month, with the unemployment rate lower than expected at 8.1% compared to estimates for 8.3%. However, retail sales data was much worse than expected, falling 5.9% in January over the previous month.
UK: Not immune to declines
The GBP suffered its first monthly decline since September, falling 1.1% versus the USD. The fall in the GBP came despite a vaccine rollout program which continued to ramp up pace, with the UK having given 51 doses per 100 people by the end of the month. Nonetheless, the broader USD strength which prevailed in March meant that even this vaccine success story could not immunise the GBP to the broader declines.
Despite the sizeable depreciation seen in March, the month commenced relatively nonchalantly for the GBP, with the currency oscillating in response to swings in both sentiment and rates. Later in the month, the price action became more interesting, with the GBP having its best oneday performance on 17 March, rising 0.5% on the day as the US Dollar Index (DXY) weakened. That said, these gains were short-lived, and on 23 March the GBP fell 0.8% versus the USD on the back of souring sentiment regarding the global vaccination story and an ongoing dispute between the exporting of vaccines from the EU to the UK.
On 18 March, the Bank of England (BOE) left its key policy rate and its quantitative easing (QE) programme unchanged at 0.1% and GBP895bn, respectively. However, the central bank did not push back hard against rising longer-dated UK government bond (gilt) yields and also reiterated its cautiously optimistic stance on the economic outlook. GBP-USD fell 0.3% on the day, although this was a smaller move than seen in DXY which rose 0.5%. UK economic data continued to paint a mixed picture, with industrial production for January falling 1.5% over the previous month but retail sales data showed a February increase of 2.1% over the previous month. January employment data was also better than expected, with unemployment rate at 5% against the consensus of 5.2%.
Japan: Higher yields = Weaker JPY
The JPY had a rough March, falling 3.8%, and was the G10 underperformer. The currency was buffeted by rising US Treasury yields at the beginning of the month, and failed to recover much ground thereafter. On 4 March, the JPY fell 0.9% against the USD, in its worst day of the month, as US 10-year Treasury yields spiked higher. The JPY weakened slightly further, but then traded sideways for much of the rest of the month. On 30 March, USD-JPY rose above 110 for the first time in a year.
The JPY was more driven by both changes in US rates and RORO than by any idiosyncratic factors. On the data front, core machine orders for January exceeded expectations by rising 1.5% over the same period last year, and retail sales for February rose 3.1% over the previous month. On 19 March, the Bank of Japan (BOJ) held its policy rate steady at -0.1%, and provided an explicit Yield Curve Control (YCC) range of +/- 25bp around 0% for its 10-year Japanese bond yields, but this range was larger than what was widely assumed by the market in the past (+/-20bp). Later in the month, BOJ Governor Kuroda stated that exchange traded fund (ETF) purchases were an important part of easing. Despite lots of talk, the JPY was unperturbed for the rest of the month, and traded within a relatively narrow range.
China: USD-RMB back above 6.50
The CNY fell 1.2% in March versus the USD as wider risk off sentiment and a narrowing yield advantage likely weighed on the currency. The CNY suffered its two worst days on 5 March and 8 March – falling 0.4% on both days – and USD-CNY rose above 6.50 for the first time since December 2020. The move came alongside broader USD strength which was likely catalyzed by surging US Treasury yields which carried the 10-year well above 1.5%, a level which it did not close beneath again for the rest of the month. Chinese economic data showed some huge year-on-year gains for retail sales and industrial production, rising 33.8% and 35.1%, respectively, in the combined period of January and February. Later in the month, the CNY continued to gradually weaken amid the broader USD strengthening environment.
Canada: The YTD outperformer
The CAD was an outlier in March and was one of the few G10 currencies to post a positive performance against the USD, rising 1.4%. Furthermore, the rise meant the CAD became the best performing currency in the G10 space of the year so far versus the USD. March began well for the CAD, and the currency had its best day of the month on 1 March, rising 0.7% against the USD. The CAD continued to gain through the middle of the month, hitting a three-year high against the USD on March 18 briefly, before falling suddenly and ending the day down 0.7% against the USD. The sharp reversal came alongside “risk off” sentiment and a 6.9% plunge in crude prices. At the Bank of Canada’s (BOC) meeting on 10 March, the central bank held rates at 0.25% and maintained its current pace of quantitative easing programme at CAD4bn per week, but maintained the need for “extraordinary” policy support. In the domestic economy, employment data surprised to the upside, with 259k jobs added in February, and the unemployment rate falling to 8.2% from 9.4% in the month before. Retail sales data also beat expectations, falling just 1.1% in January.
Australia: A good start but a difficult end
The AUD suffered losses against the USD in March, falling 1.4%. That said, the month began with the AUD on the front foot, climbing 0.9% and 0.6% in its first two sessions. The early gains came despite the Reserve Bank of Australia (RBA) announcing it would purchase AUD4bn of longer-dated bonds on 1 March. On 2 March, at the RBA meeting, the cash rate and 3-year yield target were both left unchanged at 0.1% and the central bank reiterated that it did not expect to raise rates until 2024. As the month wore on however, the AUD fluctuated but eventually relinquished gains The AUD had its worst one-day performance on 23 March, where it fell 1.6%. Domestic economic data-wise, Q4 GDP data showed a quarterly increase of 3.1%, above consensus expectation of 2.5%, and employment data continued to be optimistic, with the unemployment rate falling to 5.8%.
New Zealand: Bubble bubble toil and trouble
The NZD slumped in March and had its worst month in a year, falling 3.4% against the USD. The month began more mixed however, with the NZD generally responding to moves in the broader USD. The NZD had its best one-day performance on 17 March, rising 0.8% against the USD as the DXY weakened more generally on the back of Fed Chair Powell’s continuously dovish comments. Most of the fall in March was attributable to a slump in NZD-USD of 2.3% on 23 March following on from New Zealand Prime Minister Jacinda Ardern’s announcement of new measures to curtail exuberant house price inflation. On the domestic data front, Q4 GDP data showed a quarterly contraction of 1%, compared to consensus expectation of 0.2% growth.
Norway and Sweden: Hawkish Norges helps the NOK climb
The NOK rose 1.3% against the USD in March and was likely supported by rising oil prices and an increasingly hawkish central bank. On 18 March the Norges Bank held its policy rate flat at 0%, but brought forward its first expected rate hike to end-2021, citing rising housing prices as a concern. The NOK fell 1.2% against the USD on the day, as broader USD strength dominated. On 9 March, Norway’s GDP fell by 0.2% in January compared to the expected drop 0.6%, and the NOK rose 1% against a weaker USD for its best day in March.
The SEK fell 3.3% against the USD in March, although the price action was choppy and the currency continued to be driven by global events rather than domestic factors. That said, the inflation outlook remained particularly muted in Sweden, with prices rising 0.3% over previous month in February – lower than the consensus for 0.6%. However, the seasonally adjusted unemployment rate stayed steady at 8.9% in February, which was better than consensus expectation of 9%.
Oil: Running aground
Brent crude oil prices fell 3.9% in March and the month started poorly for oil where Brent prices fell 3.7% on 1 March, as concerns built around the OPEC+ meeting. However, concerns quickly abated on 4 March, when OPEC+ agreed to keep oil output unchanged in April and the Saudi Oil Minister announced that Saudi Arabia was in no hurry to bring back its voluntary output cut of 1 million barrels per day to the market; Brent prices rose 4.1% on the day. A further 3.9% rise on 5 March carried Brent prices to its highest level since 2019. The rest of the month was more turbulent for crude oil, with prices moving in response to the changing concerns regarding the reopening and vaccine safety. On 18 March, Brent prices suffered their worst one-day decline, falling 6.9% as demand concerns and a strengthening USD prompted oil to slip. A further 5.9% fall on 23 March more than wiped out the remaining strength for oil as rising US stockpiles prompted a fresh wave of selling. That said, oil prices did recover somewhat into month end, partly due to a container ship blocking all transit through the Suez Canal, prompting oil prices to rise 6.0% on 24 March and optimism that OPEC+ will maintain its cautious supply stance.
Precious Metals: Rollercoaster ride
It was a turbulent month for gold as the precious metal responded to rapidly moving US Treasury yields and a changing pandemic situation. In the first trading days of the month, gold slumped relatively rapidly as US Treasury yields continued to move higher. Gold prices fell to a closing low for the month of USD1684 per ounce on 8 March. Thereafter, gold made something of a comeback, and rose 1.9% on 9 March for its best day of the month; the move higher came amid a retreat in US Treasury yields. Exchange-traded fund withdrawals likely also had their part to play in gold’s decline throughout the month, with holdings falling to100 million ounces. The choppiness continued into the end of the month, but gold slumped in the final days as renewed yield and USD strength again weighed on gold, falling 1.6% on 30 March, before rallying slightly to end the month at USD1707 per ounce.
*1 This report uses Bloomberg prices.
* 2 Pandemic emergency purchase programme (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 COVID-19 outbreak.