FX Matters October 2020 | Article – HSBC VisionGo
What you may have missed last month
- Focus shifted to the US election as markets anticipate a Joe Biden win
- Germany and France entered new lockdowns
- US President Trump tested positive for COVID-19
Summary – The phantom stimulus
In October, FX markets responded to the changing rhetoric concerning additional fiscal stimulus from the US, surging COVID-19 cases in Europe, and the looming US election. It was a volatile start to the month with US President Trump’s positive COVID-19 diagnosis spooking markets, and this volatility only continued as policymakers debated a fiscal package. Alongside the stream of contradictory rhetoric regarding stimulus, G10 FX currencies fluctuated between gains and losses. Into the end of the month, sentiment became more negative as COVID-19 cases surged worldwide, threatening second lockdowns in much of Europe. The US Dollar Index (DXY) ended the month up a modest 0.2%, and most G10 FX currencies closed close to where they began.
The EUR fell slightly against the USD in October, falling 0.6%. In the first half of the month, the common currency oscillated as the perceived likelihood for additional fiscal support changed. However, as COVID-19 cases built across the continent, and investors turned negative in the second half, the currency relinquished gains, and came under further pressure as France and Germany mulled and then enacted additional lockdowns. The European Central Bank (ECB) held rates and left its QE program unchanged on 29 October, but stressed the need for continued fiscal support.
GBP-USD was supported by both shifting risk sentiment and the progress of Brexit talks in October. All eyes watched the European Commission meeting on 15 October as UK Prime Minister Boris Johnson had selected this date as a self-imposed deadline for progress in talks. Despite the apparent deadlock, both sides committed to continued negotiations, and on 28 October the headline that a deal was possible by early November likely helped the GBP, with the pair ending the month up 0.2%.
Elsewhere: Crude slumps
It was a rough month for crude oil with West Texas Intermediate (WTI) crude oil prices slumping 11% through October. Crude oil suffered volatile swings as stimulus talks moved back and forth. Furthermore, the return of Libyan exports added pressure from the supply side, albeit this was somewhat offset by the possibility of an extension of existing production cuts from the Organization of the Petroleum Exporting Countries (OPEC). That said, oil tumbled into the end of the month as the COVID-19 situation deteriorated across Europe.
US: Stimulus On, Stimulus Off
The US Dollar Index (DXY) ended October up 0.2% as uncertainties surrounding both the US election and the prospects for additional stimulus measures weighed on risk sentiment. Through the first half of the month, markets suffered whiplash as the rhetoric from Washington surrounding a potential deal flicked back and forth, with the DXY reaching a low for the month on 21 October. However, additional lockdown measures imposed in Europe at the end of the month helped the DXY pare earlier losses, as market participants re-evaluated the likely pace of economic recovery.
It was a volatile start to the month as US President Trump announced he had contracted COVID-19 on 2 October. This fleetingly prompted a ‘risk off’’ reaction which helped the USD to spike higher on the announcement, but quickly pared gains and rose just 0.1% on the day. Thereafter, focus centred on stimulus talks and markets were roiled when US President Trump announced the cancellation of stimulus negotiations on 6 October. However, he reversed course on 9 October by approving a relatively broad-based deal and stated he wanted more aid than either party was offering; the DXY fell 0.6% on the day in its worst performance of the month. The USD did stage a comeback though, making significant gains at the end of the month as the pandemic in Europe raged, and the likelihood of additional stimulus fell.
With the COVID-19 pandemic and ongoing stimulus negotiations, markets seemed somewhat less focused on the US election than they might have been in a typical election cycle. With Democratic president candidate Joe Biden maintaining a healthy lead in the polls throughout the month, investors likely chose to focus on stimulus talks rather than the election.
On the data front, non-farm payrolls disappointed market expectations on 2 October, with just 661k jobs added in September, compared to a consensus of 859k, and a prior revised value of 1.5m in August. Other forms of data for September presented a mixed picture, as advance retail sales bounced 1.9% MoM, but industrial production fell 0.6% MoM. Thus, there was some evidence to suggest the recovery from pandemic-induced lockdowns may be running out of steam. Nevertheless, on 29 October, US GDP data showed the economy expanded a record 33.1% annualised in the third quarter, above the consensus estimate of 32%.
Eurozone: Fresh lockdowns in Europe
The EUR oscillated throughout October and ended the month down just 0.6% against the USD, despite the challenging environment posed by surging COVID-19 cases across the continent. At the European Central Bank (ECB) meeting on 29 October, the central bank left its policy rate and QE program unchanged. However, ECB President Lagarde stressed the importance of continued fiscal support and stated that “all instruments” would be considered for adjustment at the December meeting; EUR-USD fell 0.6% on the day.
The EUR weakened at the start of the month on the back of negative sentiment stemming from US President Trump’s COVID-19 diagnosis, but like many other currencies, quickly erased those losses. On 5 October, EUR-USD rose 0.6% for its best day of October, as widespread optimism carried currencies higher. Furthermore, Eurozone retail sales data for August showed an increase of 4.4% MoM compared to a consensus estimate of 2.5%, which provided some evidence the recovery in Europe still had legs. On 30 October, Q3 GDP data showed a record expansion in the Eurozone, rising 12.7% QoQ and comfortably surpassing analyst expectations of 9.6%; EUR-USD still fell 0.2% on the day.
Throughout October, the ‘second wave’ of COVID-19 cases continued to build, and Germany and France both announced stricter measures. German Chancellor Angela Merkel enacted a one-month partial lockdown and French President Emmanuel Macron announced a nationwide lockdown on 28 October. Other European nations also added restrictions to curtail the spread of the virus. These additional restrictions weighed on the EUR, and the currency pared gains to finish the month down against the USD.
UK: GBP not spooked by Brexit
October was a volatile month for the GBP. Through the first half of the month, the GBP reacted swiftly to changes in the rhetoric surrounding a Brexit agreement as UK Prime Minister (PM) Boris Johnson’s self-imposed deadline of 15 October drew near. For example, on 6 October, the EU stated it had no plans to offer concessions to the UK prior to the deadline, and the GBP fell 0.8% against the USD on the day alongside broader negative sentiment catalysed by US President Trump’s cancellation of stimulus talks. Despite the bravado surrounding the EU Commission meeting, both sides agreed to continue to work toward a deal. On 21 October, the announcement that Brexit talks were to resume with a target of a mid-November deal propelled the GBP 1.6% higher against the USD on the day, for its best performance of October. In addition, on 28 October, reports suggesting the EU and the UK had made progress on key areas helped the GBP pare losses from wider ‘risk off’ sentiment, and the GBP ended the day down 0.5%.
Economic data showed a mixed picture in October, with the employment report showing a jump in the level of unemployment to 4.5%. Furthermore, the August GDP number showed an increase of just 2.1% MoM compared to a consensus estimate of 4.6%, despite the fact substantial government support schemes such as “Eat Out to Help Out Scheme” (which gave diners 50% discounts up to GBP10 per person on sit-down meals at restaurants that are registered with the scheme from Monday to Wednesday) were active through August. That said, retail sales data for September was up 1.6% MoM compared to a consensus estimate of 0.5%, and up 6.4% YoY. Overall, despite the volatility of October, the GBP ended the month up 0.2% against the USD.
Japan: Mounting risks help the JPY climb higher
In October, the JPY strengthened due to uncertainty from the US election, rising COVID-19 cases worldwide, and the changing rhetoric on additional US stimulus. That said, it was a tranquil first half of the month with USD-JPY trading largely range-bound between 105 and 106. However, on 21 October, the JPY had its best day since August as markets whipsawed on changing US fiscal stimulus headlines; the JPY rose 0.9% on the day.
Through the remainder of the month, the JPY continued to strengthen, as investors turned their attention to the US election, and additional COVID-19 restrictions in Europe prompted a souring of sentiment.
On 29 October, the Bank of Japan (BOJ) held its policy rate at -0.1% and lowered its growth forecasts for 2020, BOJ Governor Kuroda also acknowledged the continuing uncertainty surrounding the pandemic. The currency ended the month up 0.8% against the USD.
China: The appreciation continues
The CNY continued to strengthen against the USD during October. Following the national holidays at the beginning of the month, the CNY opened significantly stronger and rose 1.4% against the USD on 9 October. However, on 12 October, following the People’s Bank of China’s (PBOC) decision to remove the 20% reserve requirement for forward forex trading, the CNY relinquished some gains, falling 0.8% against the USD. Furthermore, on 17 October, the PBOC suspended the counter-cyclical factor (CCF) (which is asymmetric and only works when the RMB depreciates) in the daily USD-RMB fixing mechanism, which together with the suspension of the 20% reserve charge suggested China’s FX policy is now neutral. In the second half of the month, the CNY moved largely in-line with risk sentiment, and reached its strongest level since July 2018 on 21 October. Thereafter, the CNY pared its gains, but still put on a commendable performance, rising 1.5% through the month.
On 19 October, China released Q3 GDP data which showed the economy expanded by less than expected, rising 4.9% YoY compared to a consensus of 5.5%. However, better than expected retail sales and industrial production data helped the CNY climb 0.2% against the USD on the day.
Canada: Back where it started
The CAD ended the month basically flat against the USD. During the month, the CAD appeared somewhat less responsive to the direction of stimulus talks than most other ‘risk-on’ G10 currencies. On the data front, the September unemployment rate came in at 9%, which was lower than the consensus of 9.8% on 9 October; USD-CAD fell 0.6% on the day alongside broader USD weakness. GDP data for August showed an increase of 1.2% MoM, higher than the consensus for a 0.9% increase. On 26 October, Canadian Prime Minister Justin Trudeau stated that there would not be a new fiscal anchor in the upcoming budget, and USD-CAD rose 0.7% on the day. At the end of the month, the CAD fell further as markets turned bearish, with the currency having its worst day on 28 October where it fell 1% against the USD. The fall came alongside broad ‘risk off’ sentiment and the Bank of Canada (BOC) meeting kept its policy rate unchanged at 0.25%, but announced that it would adjust QE policy to emphasise longer-dated bonds.
Australia: All trick no treat
The AUD fell 1.9% against the USD in October as mixed sentiment and a dovish Reserve Bank of Australia (RBA) led to a weakening of the currency. Despite the RBA leaving rates unchanged, the AUD fell 1.1% on 6 October when US President Trump cancelled stimulus negotiations – prompting ‘risk-off’ selling in markets. Furthermore, on 15 October, RBA Governor Lowe stated that interest rates in Australia could be cut further and that the 10-year bond yield was higher than “almost everywhere in the world”. This fuelled speculation that the central bank would be prepared to ease further, and the AUD fell 0.9% on the day. The AUD oscillated through much of the rest of the month alongside its other ‘risk-on’ counterparts, posting a substantial 1% rise on the 21 October. However, despite the reopening of Melbourne from one of the world’s strictest lockdowns on 30 October, the AUD suffered a steep decline as the month progressed, falling 1.2% on 28 October.
New Zealand: Roller coaster ride
The NZD ended October effectively flat against the USD. The best one-day performance for the NZD currency was on 9 October, where it rose 1.4% against the USD alongside other ‘risk-on’ currencies. Following New Zealand’s relative success in eliminating COVID-19, New Zealand Prime Minister Jacinda Ardern stormed to election victory and secured the first outright majority since 1996. Following the election, on 19 October, the NZD rose 0.1% against the USD. The currency largely moved in-line with its ‘risk-on’ peers into the end of the month.
Sweden and Norway: Fell at the last hurdle
The SEK posted a strong performance in October and was one of the best G10 performers against the USD, rising 0.6%. Despite this, it was still a choppy month for the currency and moved largely in-line with broader sentiment. For example, when US President Trump announced the cancellation of stimulus talks on 6 October, the SEK fell 0.7% against the USD. Conversely, the best one-day performance for the currency was on the 9 October as more widespread optimism prompted broad USD selling. The SEK outperformed through much of the month, but slumped as a surge in COVID- 19 infection in Europe prompted new lockdowns, and the currency had its worst day against the USD on 28 October, falling 1.4%.
The NOK fell 2.1% against the USD in October. The Norwegian currency was particularly volatile, as it was subjected to both the changing risk sentiment driven by US stimulus talks and increasingly volatile oil prices. On 6 October, the currency dropped 1.7% against the USD despite a 3.7% increase in oil prices as markets were impacted by US President Trump’s comments on the potential for a stimulus bill. Albeit, these losses quickly reversed as stimulus talks then resumed. Into the end of the month, the NOK came under pressure as the oil price tumbled. For example, the NOK fell sharply at the end of the month as Brent prices collapsed, with the currency falling by 2.0% on 28 October for its worst one-day performance of the month.
Oil: Prices slip lower
In October, crude prices fell again in a volatile month driven by both the whipsaw of stimulus talks and the changing supply situation; WTI prices fell 11% in October. The month started badly for oil with West Texas Intermediate (WTI) crude oil prices falling 4.3% on 2 October as US President Trump announced he had contracted COVID-19. That said, prices quickly recovered, rising 5.9% on 5 October, as sentiment turned more bullish alongside building US fiscal stimulus hopes, and this rally continued on 6 October as the Saudis left most of the crude oil pricing unchanged. Similarly, Hurricane Delta (and towards the end of the month, Hurricane Zeta) led to a reduction in Gulf of Mexico production, which likely firmed prices.
The return of Libyan output in the wake of successful peace negotiations added pressure from the supply side, but talk by both Russia and Saudi Arabia about a possible extension of the current production cuts helped to ease fears of oversupply. Into the end of the month, oil prices suffered losses as the likelihood of additional US fiscal stimulus dropped, and a resurgence of virus cases in Europe likely hurt the outlook for demand. Finally, on 28 October, WTI fell 5.5% as a larger than expected increase in crude stockpiles hurt prices, and far-reaching ‘risk off’ sentiment swept the market. The weakness continued into the end of the month, and it was the biggest monthly drop for crude since March.
Precious Metals: A lacklustre October
October was a fairly moderate trading month for gold, falling 0.4%. The price oscillated largely between USD1870 per ounce and USD1930 per ounce as markets (and the USD) whipsawed on conflicting stories regarding additional US fiscal stimulus. Furthermore, rising Treasury yields likely capped any further gains for gold. For example, gold had its worst one-day price decline on 6 October, falling 1.8%, as US President Trump announced he was cancelling stimulus talks, and sentiment became markedly more negative. That said, once these talks recommenced, gold quickly pared losses and climbed 1.9% on 9 October to its high of USD1933 per ounce. Thereafter, moves were largely functions of the prevailing risk sentiment and changes in the USD. As virus cases surged across Europe into the end of the month, gold relinquished its gains as the USD strengthened, and dropped back below USD1900 per ounce. The precious metal recovered from its lows however, ending the month at USD1879 per ounce.
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