FX Matters September 2021 | Article – HSBC VisionGo
- September Fed Dot Plot shows median projection for first rate hike brought forward to 2022 from 2023
- Oil prices soar amid a global energy crunch
- Norges Bank delivers first G10 rate hike of this cycle
Summary: USD’s electric
The USD climbed 1.7% in September, powered higher by risk-off price action and rising US Treasury yields. The first half of the month saw the US Dollar Index (DXY) mostly trade sideways as markets anticipated the Federal Open Market Committee (FOMC) meeting on 22 September. That said, a large miss in August US Nonfarm Payrolls on 3 September, which rose 235k far below forecasts of 735k, briefly weighed on the USD. However, on 22 September, the Federal Reserve (Fed) held rates but was unexpectedly hawkish with its median projection for the first rate hike brought forward into 2022 from 2023. The DXY climbed 0.3% on the day. Fed Chair Powell also flagged a taper could come in November, which was reiterated later by various Fed officials. Risk aversion due to concerns over an Evergrande default and the US debt ceiling deadlock supported the USD’s climb alongside growing expectations for Fed policy normalisation.
The EUR fell 1.9% against the USD last month. Markets were largely unfazed by the European Central Bank (ECB) meeting on 9 September, with EUR-USD moving just 0.1% higher on the day. This was despite the ECB reducing its pandemic emergency purchase programme (PEPP) buying in 4Q21 to “a moderately lower pace”. In contrast, the EUR was dragged 0.3% lower against the USD in the aftermath of the FOMC meeting. Although the EUR steadied somewhat in the final week of September, it was ultimately weighed down by broad USD strength and tumbled again at the end of the month.
The GBP plummeted to fresh year-to-date lows in September, retreating 2.0% against the USD. That said, the currency traded in a relatively subdued manner for the first half of the month, before it was battered by the USD’s ascent and turmoil in markets due to the UK’s energy crisis in the second half. On 23 September, the Bank of England (BoE) held rates and voted 7:2 to maintain the current asset purchase target. Ramsden joined Saunders in dissenting for the first time in four years. The Monetary Policy Committee (MPC) revealed any future tightening would take place via a rate hike even if it “became appropriate” when stimulus had not yet been withdrawn, opening the door to a hike before year-end 2021.
Elsewhere: Spiking on shortages
Oil prices soared in September, with Brent crude rising 7.6%, as the market tightened due to a global energy shortage. The surge in oil prices was supported by the natural gas crisis bolstering demand for Brent and hampered production in the US following Hurricane Ida, which further constricted global oil supply. On the other hand, the USD’s ascent and the increase in US 10y Treasury yields pressed gold lower; the yellow metal sank 3.1% last month.
 This report uses Bloomberg prices
USD: Feeling supersonic
The DXY climbed 1.7% in September and hit its highest level year-to-date on the last day of the month. The USD eased in the first week as significant weakness in August Payrolls shored up expectations for continued Fed support. US Nonfarm payrolls slowed sharply in August, rising 235k, short of forecasts for 735k. Uncertainty prompted by the recent Delta variant spread drove the shortfall in job gains as August saw zero net new hiring in pandemic-sensitive leisure and hospitality sectors. This overshadowed a beat in average hourly earnings and a drop in the September unemployment rate to 5.2% from 5.4% in the month prior.
That said, the USD pared losses in the second week as it climbed higher amidst softer commodity prices and rising US Treasury yields. Its advance was briefly waylaid on 9 September due to EUR strength and Fed President Evans’s dovish view that “challenges abound” despite the strong recovery seen so far. Despite this blip, the currency continued to extend gains, rising 0.4% on 16 September, driven by an unexpected rebound in August US Retail Sales. Resilient consumer demand saw US Retail Sales excluding Autos rise 1.8% MoM in August for the largest gain in five months. US Yields rose overnight following the retail sales surprise, powering the USD to climb a further 0.3% the next day.
On 22 September, Fed Chair Jerome Powell clarified details on tapering, stating it “could come as soon as the next meeting” in November and be completed by mid-2022. Whilst the taper signal was somewhat anticipated, the shift in the Fed’s Dot Plot, which showed officials are now evenly divided on rate hikes beginning as early as 2022, was a hawkish surprise. In comparison, the Dot Plot in June showed no rate hikes until 2023. The Fed’s hawkish shift to a more aggressive path saw the USD climb 0.3% alongside rising US Treasury yields. Concerns about the approaching US debt ceiling led to some risk aversion and helped prop up the USD towards the end of September. The USD was also supported by higher US yields amid comments from various Fed officials that reiterated a taper may come “soon”.
Eurozone: Slide away
September saw the EUR slide 1.9% against the USD. The EUR started the month off tracking Bund yields higher on hawkish ECB comments and supported by softness in the greenback. ECB Council Member Bostjan Vasle asserted on 1 September that the ECB is “not ignorant to the risks” of high inflation. EUR-USD ended the day up 0.3%.
On 9 September, the ECB held rates and announced a decision to scale back PEPP buying in 4Q21 to “a moderately lower pace”. The decision was largely expected and driven by an “increasingly advanced” rebound as explained by ECB President Christine Lagarde during the press conference. The ECB revised the growth outlook upwards with 2021 GDP estimates upgraded from 4.6% to 5%. EUR-USD fluctuated on the day, initially gaining on an advance in Bund yields following the ECB’s decision, but slipped after Lagarde reiterated “the lady isn’t tapering”. The currency ended the day 0.1% higher versus the USD.
Whilst the EUR was mostly unmoved on the ECB meeting, it was dragged 0.4% lower by the US August Retail Sales beat, which propelled the USD to a two-week high. The hawkish tilt in the Fed’s Dot Plot on 22 September and increased signalling of a November taper continued to weigh on the EUR going into the month-end as the USD marched higher. The EUR saw its worst one-day performance on 29 September, plunging 0.7% on the day. This was likely due to growing Fed taper expectations, Evergrande woes, and higher US Treasury yields supporting the USD in its clamber higher.
On the data front, the economic backdrop was generally mixed. July Retail Sales missed forecasts, falling 2.3% MoM compared to expectations for holding flat, a deterioration from the month prior. However, industrial production data for the same month showed a 1.5% gain, beating consensus estimates for a 0.6% increase. Market sentiment weakened in September, with the Eurozone Manufacturing, Composite, and Services PMIs all trailing forecasts and sinking compared to last month.
UK: Gas Panic
The GBP languished in September, falling 2.0% versus the USD. The first half of the month saw the currency mostly steady and peak above 1.39, on 14 September, after a surge in August employment data saw total UK payrolls exceed pre-pandemic levels. This was largely due to Brexit and pandemic-related staff shortages, which drove vacancies above 1 million for the first time on record. While these issues may have looked positive from an employment perspective, supply chain worries created wider concerns for the UK, with spiking gas prices and fuel shortages seen across the country, which increased negative sentiment for the GBP.
On 16 September, an unexpected rebound in US Retail Sales, led the GBP to slip 0.3% against a stronger USD. Over the next few days, GBP-USD gradually drifted lower amidst broad USD strength. That said, the currency managed to find some reprieve on 23 September as risk appetite improved and markets turned their attention to the September BoE meeting.
The BoE kept rates on hold at 0.1%, with a 7-2 vote to keep the asset purchase target unchanged. Sir Dave Ramsden dissented, for the first time in four years, joining Michael Saunders to vote for an earlier end to bond purchases. The bank warned spiralling energy costs may result in inflation exceeding 4% in 4Q21 and even persist into 2022. In an effort to tame the surge in inflation, the MPC stated any future tightening would begin with a rate hike even if it “became appropriate” whilst stimulus is still being injected. Effectively this suggested a rate hike could be possible in 2021. Gilt yields climbed with the GBP following suit after the BoE’s hawkish rhetoric flagged potential for a rate hike at the next MPC meeting on 4 November. GBP-USD ended the day up 0.7%, supported by an improvement in broad risk appetite as Evergrande woes began to subside. Raised prospects for a BoE rate hike and a global bond sell-off saw Gilt yields soar to March 2020 highs on 28 September, but at the same time GBP-USD fell 1.2% on the day. Going into month-end, the GBP continued to sink to fresh year-to-date lows as a stronger USD and the UK’s energy crisis weighed on the currency.
Economic data was generally worse than expected in September. Retail Sales excluding Auto Fuel sank 0.9% YoY in August, far below expectations for a 2.5% gain. Likewise, UK Manufacturing, Services, and Composite PMIs also disappointed in September. However, Industrial Production for July rose 1.2% MoM, beating estimates for a 0.4% increase. Similarly, 2Q GDP was revised upwards to 5.5% from 4.8%.
Mainland China: Local challenges cast no shadow
The CNY slipped 0.3% against the USD, but this belied the swings in the currency seen over the month. On 3 September, broad weakness in the USD following the disappointing August payrolls report saw USD-CNY plunge below 6.44. However, the CNY ultimately only eked out a 0.1% gain as USD softness was tempered by a contraction in the Caixin PMI Services Index for the first time since April 2020. Thereafter, the CNY drifted lower as the USD extended gains.
That said, on 10 September, the CNY briefly rallied as US-China talks signalled an easing of bilateral tensions, thereby bolstering risk appetite. Even so, soft economic data in August continued to fuel concerns of decelerating growth in China weighing on the CNY. August Retail Sales slowed sharply to 2.5% YoY, far below estimates for 7.0%. As Evergrande default fears loomed amidst a backdrop of USD strength and sputtering growth in China, the CNY saw any gains made earlier in the month erased.
Japan: Falling down
The JPY slid 1.1% versus the USD in September as US 10y Treasury yields marched higher to 1.55%. On 9 September, the JPY posted a 0.5% advance amid a broadly lower USD and falling US 10y yields after the ECB’s decision to scale back PEPP purchases. The JPY extended gains, rising 0.3% on 14 September, as the USD weakened after US headline and core inflation for August missed estimates.
Governor Kuroda announced the following day the Bank of Japan (BoJ) will continue buying corporate bonds and bolster stimulus further if needed to hit the 2% inflation target. Whilst Kuroda’s comments slowed the JPY’s advance, the currency ended the day 0.3% higher against the USD as turbulence in equity markets and lower US yields continued to pressure the USD. On 22 September, the BoJ held rates and kept its yield target unchanged, reiterating its willingness to ease policy further if required. USD-JPY was unmoved by the announcement. The end of the month saw a steady weakening of the JPY alongside higher US Treasury yields as Fed taper expectations grew.
The domestic picture was generally bleak. Core Machine Orders for July rose 0.9% MoM, on 15 September, far below expectations for a 2.5% increase. Similarly, Retail Sales plummeted 4.1% MoM in August and Industrial Production fell 3.2% MoM in August. That said, the JPY was unfazed by weakness in domestic data, moving instead on market sentiment and USD price action.
Canada: Rolling with it
The CAD weakened marginally in September, retreating 0.5% against the USD. On 7 September, the currency tumbled 0.9%, for its largest daily loss of the month, as the USD advanced amidst rising US 10y Treasury yields. The following day, the Bank of Canada (BoC) kept rates unchanged and maintained the pace of asset purchases. However, Governor Macklem expressed cautious optimism about the recovery, reiterating that the BoC expects to see strong growth in 2H21. Whilst the CAD briefly pared losses after the statement, it was ultimately dragged down by the USD, which strengthened on risk-off price action. On 9 September, Macklem released guidance for how the BoC would eventually withdraw stimulus, revealing the “first move” would be to raise the policy rate instead of winding down bond holdings. The CAD ended the day up 0.2%. The currency wavered near the end of the month, tumbling 0.7% on 17 September amid broad USD strength after the US Retail Sales beat.
Dampened risk sentiment continued to weigh on the CAD going into month-end, but the currency gained some relief, rallying on Prime Minister Trudeau’s win for a third term in Canada’s election. That said, the CAD ultimately ended the month down 0.5% versus the USD.
Australia: Acquiescing to the dollar
The AUD fell 1.2% against the USD in September. The currency climbed in the first week on stronger-than-expected 2Q growth data and broad USD weakness driven by risk-on sentiment. On 7 September, the Reserve Bank of Australia (RBA) held rates at 0.1% and stuck to its planned tapering of purchases to AUD4bn. AUD-USD briefly popped higher on the RBA’s decision. However, the AUD ultimately dropped, relinquishing earlier gains, after the RBA extended its purchase timeframe until mid-February 2022 from its original November 2021 expiry date. The currency came under further pressure on 14 September when Governor Lowe reiterated conditions for a rate hike likely would not be met until 2024. Going into the end of the month, deteriorating risk sentiment and a hawkish Fed outlook continued to weigh on the AUD, reversing gains made in the first half of the month. Economic data was generally weak. August employment was softer than expected, with 146.3k jobs cut versus estimates for a decline of 80k, and the participation rate dropped.
New Zealand: Lower on the month
NZD-USD ended the month down 2.1%. The kiwi started the month on the front foot, driven by risk-on sentiment and a rally in New Zealand’s 10y yield. Prime Minister Arden’s decision to lift the nationwide lockdown outside of Auckland fuelled rate hike speculation and saw New Zealand’s 10y yield jump to a two-year high on 7 September. That said, broad USD strength, driven by a deterioration in risk appetite, overshadowed the advance in yields and NZD-USD ended the day down 0.5%. The kiwi mostly traded sideways before slipping 0.4% on 16 September as broad USD strength outweighed the NZD’s gains following its strong 2Q GDP print. New Zealand’s GDP accelerated by 2.8% in 2Q, topping estimates of 1.1%. However, strong domestic data was not enough to stop NZD-USD sliding further as the suspension of quarantine-free travel to Australia was extended by eight weeks. Despite briefly rallying 0.9% on 23 September as risk appetite improved, the kiwi was ultimately dragged lower by a stronger USD.
Norway and Sweden: Half a world away from each other
The NOK slipped a meagre 0.7% in September as the Norges Bank delivered the first G10 rate hike of this cycle and shifted its rate path moderately higher, partly shielding it from broad USD strength. On 22 September, the Norges Bank hiked rates to 0.25% citing a “normalising economy”, and signalled rates would “mostly likely be raised further in December.” With the 25bp hike already firmly priced in, the knee-jerk reaction of the NOK, which popped after the release, was likely due to the unexpected hawkishness of the Norges Bank, which signalled an accelerated tightening cycle. The NOK ended the day 0.9% higher versus the USD. The policy rate path was revised slightly higher than in June following a faster-than-anticipated bounce back in economic activity and the unemployment rate. The latter fell to 2.7% in August from 3.1% the month prior, and despite August CPI YoY challenging the 2% target with a 3.4% print, the bank remained calm in its inflation outlook.
In contrast, the SEK slumped 1.6% in September as faltering risk appetite and widening monetary policy divergence between the Riksbank and the Fed weighed on the currency. Policy appears to be stuck for the foreseeable future at the Riksbank, which reiterated, on 21 September, it does not expect to hike rates until 2024 when it held rates at its September meeting. The currency’s worst one-day performance in September came on 17 September, when it slipped 0.7% against the USD, as the rebound in US retail sales led yields higher with the USD following suit. On the data front, the economic picture in Sweden was generally mixed. July industrial orders fell 1.4% MoM, a deterioration from the month before. Whereas Retail Sales staged a rebound in August, rising 0.7% MoM, compared to a 1.2% decline the month prior.
Oil: Force of nature
Brent rallied to fresh year-to-date highs in September, with prices climbing 7.6% as the market tightened further amid a global energy crunch. On 2 September, OPEC+ decided to go ahead with its plans to raise quotas by 400,000 barrels per day. Brent jumped 2% on the day, suggesting that markets could absorb additional supply. However, US oil supply remained constrained during September as producers in the Gulf of Mexico struggled to recover from Hurricane Ida’s damage (Bloomberg). Constricted supply limited the downside from the large miss in US Payrolls as Brent slipped 0.7% on 7 September amid concerns over weak demand. Brent continued to oscillate before beginning its ascent on 15 September, where prices spiked 2.5%, as US crude inventories sank to their lowest level since 2019. The surge in gas prices also contributed to Brent’s impressive advance, with OPEC+ warning the natural gas crisis could drive oil demand as users switch fuels. Tightening global supply, particularly in the US where Gulf production remains hampered, and demand optimism saw Brent march to USD78.5 at the end of the month, its highest since October 2018.