FX Trends November 2021| The USD’s holiday cheer | Article – HSBC VisionGo
- We expect the USD rally to extend into year-end 2021, potentially aided by US data and the 14-15 December FOMC
- Relative monetary policy outlooks make the EUR look especially vulnerable…
- …failure to meet the market’s rate hike expectations may pose downside risks to the currency
USD: We expect the USD rally, which has accelerated of late, to be sustained into year-end 2021. The 14-15 December Federal Open Market Committee (FOMC) meeting should be the highlight for the USD. We do not expect any policy change to be announced at the meeting, so the main FX pinch point will be the updated “dot plot” (i.e., interest rate projections, but the projections are not a policy commitment rather they reflect the personal views of policy makers) and economic forecasts. Were the dot plot to signal a hike in 2022, the gap between the Federal Reserve (Fed) and the market (which is pricing in at least two hikes in 2022) would be closing, probably helping the USD to some extent. The market may also approach the meeting contemplating the idea that the Fed could increase the taper pace from that announced in November, so the US employment and inflation reports (to be released on 3 and 10 December, respectively) could move the needle on taper and rate hike expectations. The market may once again focus on the US debt ceiling and government shutdown topics, and we think the USD’s role as a ‘safe haven’ would win out should the stand-off continue closer to the deadlines.
EUR: The recent acceleration lower in the EUR means it is the worst performing currency in G10 so far in 2H21. We do not expect things to improve into year-end 2021. A new wave of COVID-19 cases and the flash PMIs for November (to be released on 23 November) will unlikely be provocative for the EUR. The flash estimate for Eurozone November inflation (to be released on 30 November) is likely to hit a record high, but inflation will likely moderate in 2022 and 2023, probably matching the trajectory that the European Central Bank (ECB) has in mind, in our economists’ view. So when the ECB meets on 16 December, the narrative is likely to be another dovish outpouring. As the pandemic emergency purchase programme (a non-standard measure to counter the risks posed by COVID-19) ends in March 2022, the ECB may announce some dovish actions (like an expansion of the Asset Purchase Programme). ECB President Lagarde and other policy makers have offered a clear push-back against market expectations for a rate hike in 2022, but the impact of this guidance on the heels of a likely very different tone from the Fed on the previous day could be impactful for the EUR.
GBP: We expect GBP-USD to move sideways in the short term. In our view, a 15bp hike at the 16 December Bank of England (BOE) meeting may not be enough to spur the GBP higher, given that it is already priced into the market, while dovish guidance may not be enough to prompt a sell-off. It is also worth noting that a rate hike may not be guaranteed (for example, an unexpectedly dour labour market report on 14 December). The 2022 outlook for the UK economy appears to be challenging, amid an uneven recovery, Brexit frictions and ongoing negotiations regarding the Northern Ireland protocol. These may be considerations for next year, but they can still have a bearing on the near-term outlook for the GBP.
JPY: In our view, USD-JPY has been and will continue to be mostly beholden to the movements in US 10-year bond yields. The currency pair will also keep an eye on developments around the US government shutdown and debt ceiling deadlines. Domestic stories, such as the prospect of another fiscal stimulus in Japan and local data releases like Japan’s disappointing Q3 GDP print, are not impactful as the Bank of Japan (which will meet on 17 December) cannot really respond and, in any event, improvement ahead is expected. We look for modest upside in USD-JPY, but the risk case is actually for JPY strength should risk aversion become more pronounced.
CHF: Our expectation for a somewhat weaker EUR in the coming weeks means that the downward pressure on EUR-CHF is likely to persist. We suspect the Swiss National Bank’s tolerance for the CHF strength may be reaching its limit, as the CHF trade weighted index has pushed to new highs, which risks pushing inflation back to negative territory again during 2022, if it persists. We look for EUR-CHF to track sideways, with USD-CHF moving to test its April highs.
CAD: We look for modest CAD weakness as the Bank of Canada (BOC) meeting on 8 December may struggle to sound quite hawkish enough to support the market’s current aggressive rate hike expectations. Canada’s high level of debt, which comes in around 350% of GDP nationally when the various types are added, suggests rate hikes may quickly reveal any financial or economic frailties beneath the surface. We expect oil prices to move lower during 2022, viewing current levels as excessively high. It may be another reason for the grind higher in USD-CAD to continue.
AUD: We expect the recent trend lower in AUD-USD to continue in the near term, given the lack of upcoming positive catalysts with the risks biased to the downside. The push-back from the Reserve Bank of Australia (RBA) on 2022 rate hike expectations is likely to continue, when the RBA meets on 7 December. Besides, as the slump in iron ore prices deepens further, amid possibly weaker demand from China, this may present a further headwind to the AUD staging a recovery.
NZD: The NZD-USD is better shielded from the bearish external backdrop, owing to a stronger domestic outlook and a more hawkish central bank. The key tactical driver for the NZD is likely the Reserve Bank of New Zealand’s (RBNZ) 24 November meeting. Even if the RBNZ delivers a rate hike later this month, which should be broadly supportive, the NZD may struggle to make sizeable gains given how much is already priced in. As such, we see the NZD to consolidate over the near term, with risks biased to the downside, if the RBNZ underwhelms market expectations.