FX Matters – Negative rates and tensions; GBP and CNY down | Article – HSBC VisionGo

May Highlights

Finance  ·    ·  6 mins read

FX matters highligh May

May was the month when markets focused on the potential for more central banks to go negative, geopolitical tensions were rekindled between the US and mainland China, and economic data continued to deteriorate despite the first phases of lockdown easing in many countries.



UK: The pound proves heavy

GBP-USD declined 2.0% in May, and the GBP was the worst G10 performer. Throughout the month, there was increasing speculation that the Bank of England (BOE) may take its policy rate negative; on 7 May, the BOE kept its key rate on hold at 0.10% and did not revise its Asset Purchase Programme target. The GBP ended the day roughly flat. On 20 May, however, BOE Governor Bailey confirmed to Members of Parliament (MPs) that negative rates were under “active review” – the same day interest rates in a gilts auction (i.e., an auction for the UK government bonds) fell below zero for the first time. Mr Bailey later wrote in a Guardian op-ed, on 27 May, that cutting rates into “unprecedented territory” is one option to try and revive growth. GBP-USD ended the day down 0.6%.


The GBP took a hit on 15 May as Brexit concerns grew, depreciating 0.9% against the USD and 1.1% against the EUR. At a press conference in Brussels, the EU’s Head of Task Force for Relations with the UK Barnier said that the latest round of discussions with the UK had been “disappointing”.


Noteworthy data came on 22 May, when April UK retail sales contracted by 18.1% MoM, and Public Sector Net Borrowing totalled GBP61.4bn for the month – the highest on record by some distance. This added to concerns over the UK’s fiscal health and the ongoing economic malaise, seeing GBP-USD fall 0.4%. Towards the end of the month, the GBP managed to pare some of its losses against the USD – including a 1.2% risk rally on 26 May – but ultimately ended May down against the greenback. This move higher came despite rising political pressure on UK Prime Minister Boris Johnson following reports (BBC and the Guardian, 24 May 2020) that his senior advisor had broken lockdown regulations a month earlier.

Mainland China: FX pays a-tension


The CNY depreciated 1.0% versus the USD in May. This came as tensions between the US and mainland China were brought back to the forefront of attention in markets. USD-CNY gapped 0.6% higher when onshore yuan began trading on 6 May, after concerns grew alongside the tensions between the US and mainland China at the start of the month. On 1 May, there were reports (for example, the Guardian) that the US Trump administration was crafting retaliatory measures against mainland China, as it claimed the country had handled the COVID-19 outbreak poorly, which sparked concern that the “Phase One” trade deal signed in January could be in jeopardy.


At the meeting, the NPC abandoned its specific GDP growth target and instead prioritised job market stabilisation and poverty reduction. USD-CNY continued to ascend throughout May, and ultimately ended the month around the 7.15 level.


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