FX Trends | FX led by central bank divergence | Article – HSBC VisionGo
- The 21-22 September FOMC meeting may point to further USD strength
- By contrast, the EUR will continue to face headwinds as ECB guidance remains overtly dovish, while German election may pose some upside risk
- Central bank divergence is likely see a lower AUD-NZD, in our view
USD: The USD push higher, which last month we expected to extend, in fact reversed somewhat lower during late August, but we suspect the 21-22 September Federal Open Market Committee (FOMC) may provide the excuse for a turn higher in the USD. The USD may enjoy a modest bid, were the tapering details (even if not including a kick-off date) to be announced formally as principals alongside the statement. The greater scope for USD reaction may come through the updated “dot plot” (i.e., interest rate projections). A move higher in the median of 2022 interest rate projections would be helpful to the USD, likely forcing an equivalent push higher in the 2023 median. For the newly introduced 2024 projections, two additional hikes would clearly play more positively for the USD than one. Finally, a bounce back in September employment report to be released on 8 October and US fiscal headlines (such as stimulus plans under internal Democratic Party negotiations and the US government shutdown/debt ceiling issues) would also be good news for the USD, in our view.
EUR: The EUR has spent most of the last month rallying against the USD, but this revival has lost momentum. The problem for the EUR remains that strong growth is not translating into a shift in the European Central Bank (ECB) guidance which is determined by a still dovish outlook for inflation. The central bank did pare back the announced pace of its pandemic emergency purchase programme (PEPP) but this brought it back only to the level of net purchases that had prevailed anyway in August. In our view, rate differentials in a low volatility world should continue to favour the USD over the EUR, even if those differentials do not widen materially. Nevertheless, it is worth watching German federal election on 26 September, as the formation of a left-leaning coalition could lead to a fiscal boost, posing upside risk to EUR-USD.
GBP: We continue to expect GBP-USD will remain in the August range of 1.36-1.40 as the markets and policymakers debate the appropriate next steps for policy and HSBC Positioning Index for GBP-USD is neutral. The upcoming Bank of England meeting on 23 September may show divided opinions but there is little prospect of a material hawkish shift in rhetoric. Our overall bias for some additional GBP weakness reflects growth disappointments (with HSBC UK economic activity surprise index turning sharply lower lately) and a shifting tone on fiscal policy (with a tax hike).
JPY: We see little reason for USD-JPY to move very far from 110.00, with journeys below 109 and above 111 likely to remain relatively short-lived. The focus for USD-JPY will be on the 21-22 September FOMC meeting but given we do not expect any notable moves in US yields around this event, it should not prove particularly exciting for the JPY. Similarly, the 2021 Liberal Democratic Party leadership election on 29 September is unlikely to prove provocative. Our two models of USD-JPY based on US Treasury yields, US equities, and HSBC Positioning Index suggest USD-JPY should be trading above 110 currently.
CHF: It is hard to get excited about the CHF. The Swiss National Bank (SNB) is likely to tread familiar ground at its upcoming meeting on 23 September, as recent comments from SNB Vice President Fritz Zurbruegg and Governing Board Member Andrea Maechler reaffirmed the commitment to negative interest rates (Bloomberg, 8 September 2021). As we expect the USD to modestly rebound in the month ahead, USD-CHF is also likely to go higher as well.
CAD: We expect the CAD to keep pace with a stronger USD as it closes the gap on some other “risk-on” plays. Higher oil prices saw the NOK being the best-performing G10 currency over the last month, whereas the CAD was the worst G10 performer. As such, there may be scope for the CAD to redress this imbalance. Domestically, employment and activity signals point to a strong Q3 for GDP, helped by the reopening and vaccination drive, even if the Delta variant poses downside risks. This should allow the Bank of Canada to retain an upbeat tone and probably taper its bond purchase programme at its 27 October meeting, but it is largely in the price. The outcome of the general election on 20 September will likely see little material differentiation on the fiscal front, so the CAD should not react much.
AUD: We expect a reversal of the recent upwards momentum in AUD-USD, given few upcoming positive catalysts and a bearish external backdrop (which we expect the USD to modestly rebound in the month ahead). Recently, the Reserve Bank of Australia (RBA) Chief Philip Lowe reaffirmed that tightening is unlikely to be due before 2024 (Bloomberg, 14 September). COVID-19 uncertainty is likely to continue to weigh on an already weak domestic economy with the RBA expecting 3Q GDP to contract by at least 2%. As such, the RBA is likely to remain dovish at its 5 October meeting. Additionally, the continued moderating China’s growth may add downward pressure to the AUD.
NZD: On 6 September, New Zealand announced to lift the national lockdown outside of Auckland. The Reserve Bank of New Zealand (RBNZ) Assistant Governor Hawkesby suggested the RBNZ is open to a 50bp hike at its 6 October meeting (Bloomberg, 24 August). With most of the bullish NZD domestic drivers seemingly priced in (which the rates market is pricing in a 25bp hike in October with 100% likelihood, and even ascribing a 13.6% probability to a 50bp hike (Bloomberg, 15 September)), we see NZD-USD trading sideways in the near term, unless the RBNZ were to pivot to an even more hawkish stance or the Fed was unexpectedly dovish in its upcoming September FOMC meeting. That said, the NZD should outperform the AUD, given a stronger domestic picture.
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