FX Matters November 2020 | Article – HSBC VisionGo
What you may have missed last month
- Joe Biden wins the US Presidential Election
- England enters Lockdown 2.0; the Bank of England announces extra GBP150bn of QE
- There are encouraging COVID-19 vaccine developments, with some successful trials reported
Summary – Light at the end of the tunnel?
November began with all eyes watching the US election. On 3 November, Americans headed to the polls in record numbers despite the ongoing COVID-19 pandemic. With market participants largely expecting a ‘blue wave’ (i.e., Joe Biden wins presidential race while Democrats retain the House and also secure a Senate majority), the early results gave President Trump a modest lead, and the US Dollar Index (DXY) initially spiked higher on risk aversion. On 5 November, as Joe Biden started to pull clear in a number of key states and appeared set to win the election, the DXY weakened by 0.9%.
Thereafter, the focus shifted back to the forces that have driven markets for months: the ongoing state of the pandemic, the likelihood of a vaccine, and the potential for further economic stimulus. Sentiment remained largely positive as vaccine news continued to impact the market against downside risks, with both Pfizer and Moderna reporting efficacy rates above 90%. Equities soared to all-time highs, with the Dow Jones Index topping 30,000 for the first time. All in all, it was a rough month for the USD, which fell against all other G10 currencies, and the DXY fell 2.3%.
The EUR climbed 2.4% against the USD in November. The currency rose in line with broad ‘risk-on’ sentiment through the start of the month, and climbed further as vaccine news developed. On 13 November, 3Q GDP data showed a record expansion of 12.6% q-o-q, but GDP levels remained depressed compared to pre-pandemic levels. That said, with additional lockdowns and rising case counts across Europe, the EUR struggled to match the gains made by some of its G10 peers.
GBP-USD climbed 2.9% in November amid progress in Brexit negotiations and a more general ‘risk-on’ environment. The rise in GBP came despite an additional four-week lockdown being imposed in England. In response to the likely economic hit of this second lockdown, the Bank of England (BOE) announced an additional GBP150bn of asset purchases at its policy meeting on 5 November. Despite the policy loosening, GBP-USD rose 1.2% on the day as the USD weakened more broadly on the increased likelihood of a Joe Biden victory. 3Q GDP data showed a record bounce of 15.5% q-o-q, but remained far below the pre-pandemic level.
Elsewhere: Killing the golden goose
Despite a weaker USD, gold fell 5.4% in November as some significant risks appeared to dissipate from the global economy. Firstly, with the election out of the way and a Joe Biden victory secured, the risks of higher geopolitical tensions appeared to reduce. Furthermore, following Pfizer’s vaccine announcement, gold prices plunged 4.5% on 9 November as investors re-evaluated the likely duration of the pandemic. With fewer uncertainties, there was little prospect of gold climbing higher, and holdings of gold exchange traded funds (ETF) fell for the first time since November 2019.
US: Joe Biden wins the US election
The US Dollar Index (DXY) ended November down 2.3% as equity markets climbed higher alongside Joe Biden winning the election and significant progress in vaccine development. The month kicked off with the DXY weakening as market participants anticipated a ‘blue wave’ (i.e., Joe Biden wins presidential race while Democrats retain the House and also secure a Senate majority). As results filtered in, it appeared that President Trump might sweep to another surprise victory as he did in 2016 and the DXY strengthened significantly in intraday trading. However, by 5 November, markets were pricing a Joe Biden victory, and the DXY had its worst one-day performance of the month, falling 0.9%.
Ultimately, it was more like a “blue ripple” for the Democrats, although both Senate races in Georgia will head to a runoff in January. Despite President Trump’s refusal to concede at the time of publication, markets largely ignored the politicking, and instead diverted their gaze onto the progress towards a COVID-19 vaccine and the prospects for additional stimulus measures.
On 5 November, the Federal Open Market Committee (FOMC) held its policy rate at close to zero but stressed how risks to the recovery remained sizeable, commenting that the recent rise in virus cases in the US was particularly concerning. Furthermore, Fed Chair Powell emphasised how the recovery would “be stronger with more fiscal support” from Washington.
On 9 November, Pfizer announced its COVID-19 vaccine was over 90% effective in its Phase 3 study. Despite being a typically ‘risk-on’ announcement, the DXY rallied 0.5% on the day, and the USD clocked especially sizeable gains against haven currencies such as the JPY, with USD-JPY rising 2% on the day. However, further vaccine news on 16 November by Moderna and on 23 November by AstraZeneca prompted more typical ‘risk-on’ reactions, and the DXY fell to its two-year low on 23 November. That said, the DXY rebounded within the day alongside an upside surprise in manufacturing PMI, which came in at 56.7 against a consensus of 53.0. This came after a slew of positive economic data, with non-farm payrolls beating expectations by 58k and the unemployment rate falling to 6.9% from 7.9% in the prior month. Despite the broadly positive economic news, the USD continued to sell off into the end of the month, as global risk appetite remained supported.
Eurozone: Climbing higher
The EUR had a strong start to November, and although it reversed some gains along the way, the EUR eventually climbed to end the month up 2.4% against the USD.
Like most G10 currencies, attention was focused on the US election at the start of the month. On 4 November, as US President Trump seemed to take an early lead, the EUR briefly slumped toward 1.16, but recovered all its losses as the results gradually moved to favour Joe Biden. EUR-USD ended the day up 0.1%. On 5 November, as it became clearer Joe Biden would win the election, the EUR ripped 0.9% higher alongside broad ‘risk-on’ sentiment. On 9 November, as Pfizer announced positive vaccine results in Phase 3 trials, EUR-USD briefly climbed above 1.19. However, the common currency slipped as the day went on, and finished down 0.5% against the USD, despite the S&P500 Index setting a new intraday all-time high. Into the end of the month, EUR-USD managed to climb higher and eventually ended the month above 1.19.
Data in the Eurozone was mixed in November, with Eurozone 3Q preliminary GDP data slightly worse than expected, rising 12.6% over the previous quarter, compared to a consensus of 12.7%. Nonetheless, this was still a record expansion for the quarter. In Germany, industrial production data for September disappointed, rising 1.6% over the previous month, against a consensus of 2.5%. However, the equivalent data for France beat the consensus estimate. Eurozone retail sales data underwhelmed, with a 2% fall over the previous month in September versus an estimated 1.5% drop. Although the European Central Bank (ECB) did not have a policy meeting in November, rhetoric from ECB President Christine Lagarde hinted that the central bank was gearing up for additional stimulus at the December meeting. Furthermore, Lagarde urged governments to provide relief “without delay” to mitigate the worst impact of the COVID-19 pandemic.
UK: A deal is in sight
The GBP put on a strong performance in November as widespread optimism related to the COVID-19 vaccine progress lifted markets higher. On 4 November, as Donald Trump took an early lead in the polls, the GBP dropped against the USD alongside ‘risk-off’ sentiment in markets. Unlike many of its G10 counterparts, however, the GBP failed to pare losses, and ended the day down 0.5%. However, the next day saw the GBP rallying alongside other G10 currencies, and the GBP climbed 1.2% against the USD for its best one-day performance of November. The GBP continued to rally on 9 November as positive vaccine news buoyed risk sentiment, and GBP-USD briefly crossed 1.33 intraday before pulling back. Although the GBP briefly fell following uncertainty around Brexit progress, it did manage to reverse its losses and ended the month up 2.9% against the USD.
Economic data was mixed but largely disappointed in November, and showed the economy was already facing headwinds prior to the imposition of further lockdowns in November. The unemployment rate rose from 4.5% to 4.8% in September, and 3Q GDP data disappointed expectations, increasing 15.5% compared to a consensus of 15.8% q-o-q. Industrial production data for September also disappointed. The one bright spot came from retail sales, which rose 1.3% m-o-m in October, higher than consensus of 0%. However, with England entering a second lockdown on 5 November, the GBP was generally unperturbed by economic data, even with the Bank of England (BOE) also turning more dovish.
On 5 November, the BOE met and increased its quantitative easing (QE) programme by GBP150bn – exceeding market expectations of GBP100bn. This was largely in response to the announcement of the second lockdown, which threatened to derail the economic recovery. Furthermore, this announcement likely gave UK Chancellor Rishi Sunak the green light to expand fiscal stimulus – such as with the extension of the furlough scheme to March – as bond yields would remain low. In Brexit, progress was reportedly made throughout the month, with headlines on 17 November that a deal could be possible in the next week. However, negotiators failed to put pen to paper, as the final creases involving fishing rights and the “level-playing field” still needed to be ironed out.
Japan: Vaccine optimism no obstacle for the JPY
The JPY started November strongly and put on its best one-day performance against the USD on 5 November, climbing 1% as a wave of USD selling allowed most currencies to strengthen.
However, this rise was derailed on 9 November as Pfizer announced its phase 3 vaccine had an efficacy above 90%. In response, “safe havens” were hammered and USD-JPY climbed 2% on the day. Although the JPY did manage to pare some of its losses, it was again hit hard by positive vaccine news on 23 November, with USD-JPY increasing 0.8% on that day. Nevertheless, the JPY ended November up 0.3% against the USD.
GDP data for 3Q showed the Japanese economy expanding at a faster pace than expected, rising 5% q-o-q compared to a consensus for 4.4%. That said, the JPY was relatively unmoved by the data, and continued to be driven by global risk sentiment and its haven characteristics.
China: Stronger and stronger
The CNY put on another strong performance in November, climbing 1.7%. The currency was helped by a perceived reduction in geopolitical risk as a result of the election of Joe Biden, and the wider ‘risk-on’ sentiment that swept through markets on vaccine optimism. The CNY had its best day of the month on 5 November when it became clearer that Joe Biden would win the US election, with the currency rising 0.7% against the USD. Thereafter, the CNY strengthened gradually, rising another 0.3% on 16 November following the signing of the Regional Comprehensive Economic Partnership (RCEP) agreement, which marked the creation of the world’s largest free-trade agreement. The CNY traded mixed thereafter, but still put on a commendable performance, and has risen 5.8% y-t-d.
Economic data showed the recovery in China continued to move at full steam ahead, with industrial production data for October showing a rise of 6.9% over the same period last year, better-than-expected manufacturing and services PMIs, and retail sales rising 4.3% over the same period last year (although this came below market expectations of an increase of 5.0%).
Canada: Stronger on the Biden bounce
The CAD finished November in the middle of the G10 pack, rising 2.4% against the USD. The CAD started the month strongly as markets anticipated a ‘blue wave’ victory (i.e., Joe Biden wins presidential race while Democrats retain the House and also secure a Senate majority). The CAD had its best one-day performance on 2 November, rising 0.8% against the USD. As greater clarity on the election dawned on 5 November, the CAD climbed higher again, rising 0.7% against the USD on the day. Thereafter, moves for the CAD were much more muted. On 12 November, the CAD slipped 0.6% against the USD as sentiment became markedly more negative. Domestically, data showed an improving picture, with the unemployment rate falling to 8.9% from 9% previously, and retail sales data for September showing better-than-expected results, rising 1.1% over the previous month. Even inflation data beat expectations, with CPI data for October rising 0.7% over the same period last year, compared to a consensus of 0.4%.
Australia: Negative rates “unlikely”
In November, the AUD rose 4.5% and climbed in line with rising commodity prices and more upbeat sentiment. The AUD had its best one-day performance on 3 November when the Reserve Bank of Australia (RBA) cut rates to 0.1% and announced an expansion of QE by AUD100bn. Despite the additional easing, AUD-USD rose 1.5% on the day, likely due to RBA Governor Lowe’s comments that negative rates were “unlikely”. On 5 November, as Joe Biden looked poised to win the election, the AUD climbed a further 1.4%, marking a searing start to the month. Employment data for October surprised significantly to the upside, with an employment change of 179k compared to an expected fall of 30k. Despite the significant positive surprise, the currency continued to be driven by broader global sentiment, rather than idiosyncratic factors.
New Zealand: Stronger on its own dime
The NZD put on a strong performance in November, rising 6.1%. It was helped by positive risk sentiment regarding the vaccine and Joe Biden’s victory, rising commodity prices, and comments from the Reserve Bank of New Zealand (RBNZ). Like most other ‘risk-on’ currencies, the NZD had a strong start to the month, and had its best session on 5 November as the likelihood of a Joe Biden win increased; NZD-USD rose 1% on the day. On 11 November, the RBNZ held rates at 0.25% and stated that policy would need to be stimulatory for a long time. However, the central bank walked back some comments on negative rates, and introduced a new program to give cheap loans to banks. There was also a suggestion from New Zealand Finance Minister on 24 November that the central bank should take property prices into account more in its policy settings. This would imply tighter policy given the boom in the housing market in New Zealand in recent years. Thus, the NZD rose 0.7% on the day as markets repriced the likely near-term path of rates.
Norway and Sweden: Scandies roar higher
The NOK climbed 7.1% against the USD in November and was the G10 outperformer, buoyed by broader risk sentiment and a big rally in oil prices. It was a solid start to the month for the currency, and on 3 November posted its largest daily gain for the month of 1.9% alongside widespread optimism about a potential ‘blue wave’ in the US, and rising commodity prices. Thereafter, the gains kept building as Joe Biden’s win looked more likely and positive vaccine news lifted global equities higher. On 5 November, the Norges Bank held its policy rate at zero and signalled the rate would remain unchanged until “economic conditions normalise”; the NOK rose 1.7% against the USD amid broader ‘risk-on’ moves. By the end of 10 November, the currency had risen 5.8% already. That said, as sentiment soured the NOK relinquished some gains in the middle of the month. However, as more positive vaccine news emerged and commodity prices continued to rise, the NOK was able to resume its appreciation trend.
The SEK rose 3.7% against the USD in November amid widespread positive sentiment which lifted equity markets higher. The currency had its best day on 5 November when it rose 1.1% against the USD as markets priced in a higher probability that Joe Biden would win the election. Unemployment data for October showed a rosier picture than had been expected, and 3Q GDP data similarly outperformed, coming in at 4.9% over the previous quarter, against the consensus expectation of 4.3%. On 26 November, the Riksbank announced an expansion to its QE programme by SEK200bn, although it maintained its rates at 0%. This prompted some modest underperformance of the SEK into month-end.
Oil: Prices rip higher
After suffering declines for the past two months, oil prices came back with a vengeance as investors re-evaluated the likely demand outlook on the back of positive vaccine news. WTI crude oil prices rose 27% through the month. Oil prices did not suffer steep declines even when faced with a growing likelihood of a Joe Biden presidency and potential shift to green energy; for example, on 5 November, WTI crude oil prices dropped by only 0.9%. With a democratic administration likely to result in more stimulus, this perhaps buoyed oil prices more than the potential downside risk of Biden’s energy transition policies. On the supply front, oil prices were likely supported by news that OPEC+ (which includes the Organization of the Petroleum Exporting Countries (OPEC), Russia and other allies) would extend supply cuts through 1Q 2021 in the face of weak demand and a continued uncertain outlook.
The best one-day performance for oil came on 9 November alongside news from Pfizer that its Phase 3 COVID-19 vaccine trials had an efficacy rate above 90%; WTI crude oil prices climbed 8.5% on the day. Thereafter, the direction of oil prices was firmly to the upside, with further positive vaccine news driving crude prices higher.
Precious Metals: A choppy month
Gold ended November down 5.4% in what was a fairly volatile month for the precious metal. On 5 November, as a Joe Biden victory became apparent and the US Dollar Index (DXY) weakened markedly, gold had its best one-day performance and rose 2.5%. On the 6 November, gold climbed higher again, crossing the USD1,950 per ounce mark for the first time since September. However, following Pfizer’s vaccine announcement on 9 November, prices of the yellow metal slumped 4.5% as investors re-evaluated the likely path of economic recovery and sold safe haven assets. Through the rest of the month, gold prices dropped further as additional vaccine news buoyed risk sentiment and pushed equities higher. On 27 November, US President Trump announced that he would leave office if the Electoral College voted for Joe Biden. Alongside this reduced political uncertainty, gold slid below USD1,800 per ounce to its lowest level since July. Holdings of gold exchange traded funds (ETF) followed a similar trajectory, and fell for the first month since November 2019 to 107.7 million ounces (moz).