FX Matters September 2020 | Article – HSBC VisionGo
What you may have missed last month
- The Fed signals rates will remain near zero for at least 3 years
- The ECB holds rates; no need to “overreact” to EUR strength
- Europe sees resurgence of COVID-19 cases
Summary - The USD fights back
September was the month where the USD regained some of its losses following several consecutive months of weakening. This strength occurred alongside broader ‘risk off’ sentiment, which saw the S&P 500 Index fall 10% from its all-time highs at its worst. Initially, the European Central Bank (ECB) meeting captured the attention of FX markets as participants awaited the reaction of the central bank to recent EUR strength. Following the decision not to “overreact” to currency movements, focus shifted to the Federal Open Market Committee (FOMC) meeting, where policymakers indicated they would keep rates on hold for at least three years. The extension of forward guidance was largely met with indifference in FX. As the month grew older, a resurgence of virus fears and a continued lack of fiscal stimulus in the US helped the US Dollar Index (DXY) end the month up 1.9%*
The EUR entered September on the front foot, and climbed above 1.20 for the first time in two years on 1 September. That said, following comments from the ECB Chief Economist Lane that the EUR “does matter”, the EUR fell precipitously, and failed to climb back to previous highs. Later in the month, as “risk off” sentiment dominated markets, the EUR fell further, ending the month down 1.8%.
The GBP was one of the G10 underperformers for September as Brexit returned to the foreground. In recent months, the GBP had nonchalantly climbed higher despite the ever-closer Brexit deadline. However, this mirage was shattered when the Internal Markets Bill catalysed a rise in tensions with the EU which threatened to derail negotiations. Comments from European Commission President Von der Leyen that she was “convinced” an EU-UK trade deal was possible helped support GBP for a while, but fears returned later in the month, and the GBP finished September down 3.4%.
Elsewhere: Oil – volatility returns
For the first time since April, oil saw a monthly decline, with Brent crude oil prices falling 9.6%. This change in dynamic was prompted by both demand-side concerns about the lingering effects of the pandemic, and the supply-side impact of Libyan oil exports returning to the market. Thus, September was a more volatile month for oil prices, with the biggest one-day loss occurring on 8 September, where WTI crude oil prices fell 7.6% on the back of Saudi Arabian price cuts, which sounded the alarm in the oil markets.
US: The USD staging a comeback
The US Dollar Index (DXY) ended September up 1.9%. For the USD, September was the month where market participants watched central bank meetings particularly closely. Initially, the focus was on the European Central Bank (ECB) to see if policymakers would try to “talk the EUR down”, but comments from ECB President Lagarde that they would not “overreact” stopped a more marked fall in the EUR. Thereafter, attention moved to the Federal Open Market Committee (FOMC) meeting as investors awaited more information about the policy framework review. Despite issuing even further forward guidance that the Federal Reserve (Fed) would not hike rates for at least three years, the DXY rallied through the rest of the month alongside a broader fall in equity markets which saw the S&P 500 Index (briefly) drop more than 10% from its 2 September all-time high.
US economic data pointed to a continued recovery from the COVID-19 induced recession. On 4 September, non-farm payrolls showed the US economy added 1.37m jobs in August, largely in line with the consensus of 1.35m. Furthermore, other data such as retail sales and industrial production numbers showed the expansion of economic activity was continuing. That said, the pace of recovery appeared to be slowing, with retail sales for August bouncing 0.6% MoM compared to the previous month’s increase of 0.9%, for example.
Into the end of the month, investors increasingly looked to Washington in the hope that there may be additional fiscal stimulus. However, conflicting reports about the likelihood of further support prompted equity markets to fluctuate with “risk off” sentiment becoming the driver of markets. The DXY had its best day and rose 0.8% on 21 September as the prospects of additional stimulus appeared to narrow following the death of Ruth Bader Ginsburg, which shifted the attention of Congress to the Supreme Court. The USD pared some gains into month end as political focus shifted to the first US Presidential election debate on 29 September.
Eurozone: Stalled at the green light
The EUR had a strong start to the month and on 1 September briefly crossed 1.20 for the first time since 2018. That said, following comments from the European Central Bank (ECB) Chief Economist Lane that the exchange rate “does matter”, the EUR staged a quick retreat, and failed to climb above the key level again. Thereafter, the currency was largely on the back foot, and ended the month down 1.8% against the USD.
During the first half of the month, market participants focused primarily on central bank meetings. In the run up to the ECB meeting on the 10 September, the EUR declined as rhetoric from key policymakers suggested the central bank was growing more concerned about EUR appreciation. However, ECB President Lagarde’s comment that there was no need to “overreact” to recent strength was taken (briefly) as a green light for EUR-USD to rise, and the pair fleetingly crossed over 1.19 in intraday trading, before paring gains and finishing the day up just 0.1% against the USD. As the month grew older, the lack of additional stimulus from both the Federal Reserve (Fed) and Congress led to additional “risk off” sentiment which saw the EUR drop substantially. The worst one-day performance for the currency was on 21 September amid broader USD strength, and the currency fell 0.6% against the USD.
A resurgence of COVID-19 cases across a number of European countries likely also weighed on the currency, as the month progressed. Notably, France re-introduced lockdowns in its ‘second city’ Marseille on 25 September and this likely added to fears a resurgent virus may derail the recovery in Europe.
UK: The party’s over (at 10pm)
September was a rough month for GBP as mounting Brexit risks, the possibility of additional monetary easing, and added COVID-19 restrictions began to take their toll. For the first time in several months, the GBP appeared more reactive to headlines regarding progress toward a trade deal with the EU, as the self-imposed 15 October deadline grew near for the UK government.
Through the first half of the month, the GBP fell persistently as comments from both the UK and the EU appeared to show rising difficulties in Brexit negotiations. Notably, tensions flared with the unveiling of the UK’s Internal Market Bill on 6 September, which threatened to undermine key parts of the Withdrawal Agreement. In the ensuing week, the GBP dropped 3.6% to levels not seen since July and had its worst one-day performance on 10 September, when the EU threatened legal action if the bill was not withdrawn or amended; GBP fell 1.5% against the USD on the day.
On 17 September, the Bank of England (BOE) held Bank Rate at 0.1% and left its QE program unchanged, but continued to stress the risks to the economy and possibility of further stimulus being required. The GBP was flat on the day despite news that policymakers were briefed on how to effectively implement negative interest rates. A range of monetary policy committee (MPC) members opined on the potential for negative rates through the month, although there was little sign of a clear conviction on this policy step.
Later in September, UK Prime Minister (PM) Johnson announced additional COVID-19 restrictions including limiting gatherings to just six people and imposing a curfew on bars and restaurants of 10pm. The announcement demonstrated the economic recovery may not be so smooth, and UK PM Johnson’s comments on 22 September that new restrictions may last for six months weighed on the GBP, with the currency falling 0.7% on the day against the USD. Into the end of the month, some optimism on Brexit talks helped the GBP pare some losses, but ultimately ended the month down 3.4%.
Japan: The safe-haven yen
The JPY was the only currency in the G10 space to end the month up against the USD. Even with a new Japan Prime Minister (PM) being appointed, domestic factors took a backseat with this outperformance being driven by “risk off’ sentiment that saw equity markets tumble 10% through September.
Through the first half of the month, USD-JPY largely traded in a narrow range between 105.5 and 106.5. However, following the Federal Open Market Committee (FOMC) meeting on 16 September, the JPY began to strengthen more markedly as “risk off” sentiment began to sweep through markets, with USD-JPY hitting an intraday low of 104 on 21 September.
Domestically, on 16 September, Yoshihide Suga was elected PM following the resignation of Shinzo Abe; the JPY climbed 0.5% against the USD on the day as the new PM pushed significant reforms in a policy speech. On 17 September, the Bank of Japan (BOJ) meeting was largely a non-event with no announced changes in policy, albeit they did maintain they would act “without hesitation” if needed; USD-JPY fell 0.2% on the day. For the remainder of the month, the JPY weakened somewhat, but still finished up 0.4% against the USD.
China: Easing tensions help the RMB climb higher
Despite broader USD strength, the CNY strengthened 0.8% against the USD in September. The CNY was likely helped by a batch of economic data that showed the economy was rebounding at a faster pace than expected. For example, on 15 September industrial production data for August showed a 0.4% monthly bounce and retail sales showed a 0.5% increase. Both of these releases were higher than the consensus estimates; the CNY rose 0.4% against the USD on the day. Finally, the addition of China’s bonds to the FTSE World Government Bond Index (WGBI) – confirmed on 24 September − may have helped the currency climb higher, as internationalisation of the currency could drive inflows.
However, in the second half of the month, the CNY relinquished some of its gains as sentiment became more negative across the world. Notably, the currency had its worst day on 21 September where it fell 0.5% against the USD. Furthermore, on 24 September, the USD-CNY fixing rate was set at a higher level than expected, and this added to speculation that the People’s Bank of China (PBOC) may move to prevent continued yuan strength.
Canada: “Whatever it takes”
The CAD fell less than some of the other “risk on” currencies in September but still finished the month down 2% against the USD. On 9 September, the Bank of Canada (BOC) held its benchmark overnight rate at 0.25% and signalled the rate would not change until capacity had been absorbed; the CAD finished the day up 0.7% against the USD. Thereafter, the CAD stabilised through the middle of the month, but resumed its declines on 21 September, as “risk off” sentiment saw equity markets drop lower. On 23 September, Canada Prime Minister Trudeau outlined a legislative agenda designed to do “whatever it takes” to return the Canadian economy to prosperity. The plan included an extension of the wage subsidy scheme and promised new jobs in a greener economy, but lacked details on how the government planned to bring borrowing lower; the CAD fell 0.6% against the USD on the day. On the data front, GDP data for July showed the economic recovery continued with a 3% monthly bounce; the CAD climbed 0.5% against the USD on the day.
Australia: Going down, down under
AUD-USD fell 2.9% in September amid a wave of dollar strength. On 1 September, the Reserve Bank of Australia (RBA) held interest rates but stated their willingness to remain “highly accommodative as long as is required”; AUD-USD fell 0.1% on the day. Thereafter, the AUD began to fall against the USD as Q2 GDP data on 2 September showed a decline of 6.3% YoY compared to a consensus estimate of a 5.1% fall; AUD-USD fell 0.5% on the day. The currency continued to fall as the month wore on, alongside further falls in commodity prices. Expectations for another RBA cut before the end of the year also grew, weighing on AUD. The worst one-day performance for the currency came on 21 September where it fell 0.9% alongside a 2% fall in gold prices and broader USD strength which prevailed in markets.
New Zealand: Struggling with “risk off” sentiment
The NZD ended the month down 1.7% against the USD. The currency struggled alongside the broader “risk off” sentiment, which allowed the USD to climb higher, but also the growing possibility that the Reserve Bank of New Zealand (RBNZ) would consider using negative interest rates. On 23 September, the RBNZ held its benchmark interest rate at 0.25% and reiterated its forward guidance, but a broader “risk off” atmosphere meant the NZD ended the day down 1% (albeit this was a smaller decline than many of its “risk on” peers).
Norway & Sweden: G10 underperformers
The NOK finished September down 6.4% against the USD for its worst month since March – making it the G10 underperformer. The currency was battered alongside generally “risk off” sentiment and substantial declines in commodity prices. Furthermore, on 8 September, GDP data for July showed an increase of 1.1% over previous month, less than the 2% consensus estimate; the NOK fell 2.1% on the day against the USD, with the 5.3% decline in Brent crude oil prices likely further weighing on the currency. On 24 September, the Norges Bank held rates at 0%, but unlike many other central banks, continued to signal a possible rate hike in Q3 2022. That said, the policy statement from the Norges Bank was significantly more dovish than expected, and the NOK fell 0.1% against the USD on the day. Following hefty September declines, the NOK is the worst-performing G10 currency year-to-date, down 5.9%.
The SEK also had a rough September and finished the month down 3.4%. This weakness appears to have been driven by broader dollar strength rather than factors specific to Sweden. That said, the virus situation in Sweden deteriorated in September, with Sweden Prime Minister Lofven stating the government would introduce new restrictions should the number of cases continue to rise. The worst one-day performance for the currency occurred on 23 September with a decline of 1.1% against the USD amid a broader equity market sell-off, which drove the USD higher.
Oil: Volatility returns
In September, crude oil prices tumbled for the first time since April as concerns again started to build around a ‘second-wave’ of the COVID-19 pandemic which could potentially undermine the demand recovery for oil products. On 8 September, WTI crude oil prices had its worst day of the month and fell 7.6% following the announcement that Saudi Arabia was markedly cutting the price of its crude. Oil did manage to pare some of its losses and on 16 September WTI crude oil rices climbed 4.9% as the Energy Information Administration (EIA) report showed crude oil inventories fell by 4.4m barrels. However, the gains were short-lived as the resumption of Libyan oil exports and heightened concerns that a ‘second-wave’ of the virus could prompt a return of the demand and supply imbalance that rocked markets earlier in the year. For the rest of the month, oil prices were choppy, but WTI crude oil prices ended September down 5.6%.
Precious Metals: Gold − losing its lustre?
September was a rough month for gold as a resurgent USD created some difficult headwinds for gold; gold ended the month down 4.2%. The month began poorly for gold when on 2 September it slumped 1.4% as the USD began to strengthen more markedly on a weakening outlook. Thereafter, price movements were relatively calm, with gold recovering some losses in the run up to the Federal Open Market Committee (FOMC) meeting on 16 September. However, the lack of reference to additional easing at the meeting meant that there was little reason for further purchases of gold, and through the rest of the month, the price fell more aggressively. The worst one-day performance for gold was on 21 September, where gold and silver prices fell 2% and 7.7% respectively, as the USD appreciated markedly on the back of ‘risk off’ sentiment which swept through equity markets. It was a similarly bleak month for silver, which fell 17.4% and relinquished a substantial portion of gains made in recent months. That said, long positions on futures exchanges and exchange-traded fund (ETF) holdings had risen significantly, so this weakness was likely a function of some position liquidation. Both gold and silver still have solid gains, with year-to-date increases of 30% and 24% respectively.