FX Matters July 2020 | Article – HSBC VisionGo

July highlights

Finance  ·    ·  7 mins read

What you may have missed last month

  • EU leaders agree EUR750bn Next Generation stimulus 
  •  The Fed remains on hold amid “extraordinarily uncertain” outlook 
  • US Q2 GDP falls an extraordinary 32.9% on an annualised basis
  •  July sees a substantial USD decline

Summary – An injection of stimulus

In July, FX moves were driven by changes in risk sentiment which came from shifting expectations of potential stimulus packages and the development of a COVID-19 vaccine. Thus, when EU leaders agreed on the composition of the EUR750bn Next Generation Fund, ‘risk-on’ sentiment prevailed, and the US Dollar Index (DXY) weakened; an injection of stimulus helped financial market participants feel immune (at least temporarily) to the rising numbers of COVID19 cases.  

The DXY ended July down 4.2%*. Throughout the first half of July, the USD suffered modest declines as risk sentiment turned positive with improving economic data and positive vaccine news from both the University of Oxford and Moderna trials (Source: Bloomberg, 14 July). Similarly, increasingly bullish expectations regarding the potential for an agreement at the EU summit likely exacerbated the dollar’s declines. After the 21 July agreement, the slump for the DXY accelerated through the remainder of the month, and ‘risk-on’ currencies outperformed. The Federal Reserve (Fed) remained on hold on 29 July and reiterated its lower for longer stance, stressing its willingness to aid the recovery amid an uncertain outlook.  

The EUR rallied 4.8% against the USD in July. The EUR initially climbed modestly against the USD on the expectations for the Next Generation EU fund, but most gains for the EUR came following the historic agreement on 21 July. Thereafter, the EUR rose rapidly alongside other G10 currencies and reached its highest level since 2018.  

GBP-USD rallied 5.5% in July. Despite a continued lack of progress in Brexit negotiations, The GBP rallied in-line with the general “risk-on” mood of markets. The month began strongly despite comments from German Chancellor Merkel that Germany was “preparing for no deal on every level”, and the strong performance accelerated following Sunak’s opening of the fiscal taps. After the EU summit, the GBP continued to climb higher, with GBP-USD climbing above 1.30 for the first time since March this year.  

Elsewhere: Golden arrows and silver bullets  

Throughout July, precious metals outperformed. Gold soared 10.9% and rose in 18 of 23 of its trading sessions; while silver was up 34% over the month. Notably, following the agreement of EU leaders on 21 July, gold climbed 1.3% and continued to rally in each session thereafter, surpassing its previous all-time high set in 2011 and continuing to climb toward USD2000 per ounce. 

US: The USD slides down

The US Dollar Index (DXY) ended the month down 4.2%. Sentiment was driven by both the possibility of a COVID-19 vaccine, and the relative likelihood of additional stimulus from both the EU and US. Through the first half of the month, the ‘Risk On-Risk Off’ (RORO) playbook guided the direction of the DXY. However, following the agreement on the EU stimulus package the narrative for the DXY became more bearish and the USD weakened persistently through the remainder of the month.  

The USD started July on the back foot as risk appetite swelled following mounting evidence of a revival in global economic activity. Notably, on 2 July, US June nonfarm payrolls exceeded expectations with a print of +4.8m compared to a consensus estimate of +3.2m. Furthermore, June retail sales rose 7.5% over the previous month, compared to consensus of 5.0%, demonstrating the pace of recovery may be faster than initially expected. This, coupled with increasingly positive expectations for EU stimulus, meant the DXY weakened 1.6% before the EU summit had even begun.  

Following the 21 July announcement that EU Leaders had agreed a EUR750bn stimulus package, the USD’s decline accelerated, despite rising US-China tensions and rising virus case counts in the US and around the world. On 29 July, the Federal Open Market Committee (FOMC) held their policy rate at the zero lower bound and Chairman Powell emphasised the “extraordinary uncertainty” which the economy faced and the willingness of the Federal Reserve (Fed) to support the expansion for “as long as it takes”. On 30 July, US Q2 GDP numbers showed a 32.9% annualised drop which is the worst quarterly drop since the 1940s and the DXY fell 0.5% on the day to top off a particularly grizzly month for the USD. 

Eurozone: Next Generation EU lifts the EUR higher

EUR-USD rose 4.8% in July. Throughout the first half of the month, there was a gradual grind higher in EUR-USD, with the pair climbing alongside the increasing expectations that EU member states would be able to agree a deal for the Next Generation EU Fund. On 16 July, the European Central Bank (ECB) met and kept their policies unchanged and stressed that there would have to be “significant upside surprises” in order to prevent them from using the full pandemic emergency purchase programme (PEPP)** allowance of EUR1.35trn; the EUR fell 0.2% against the USD on the day.  

On 21 July, EU leaders finally reached a compromise deal which paves the way for EUR750bn of investment to help the recovery from the COVID-19 induced recession. In the run-up to the meeting, EUR-USD climbed steadily higher on expectations that a deal would be reached. However, over a weekend of negotiations tensions were high as the more ‘frugal’ nations led by the Netherlands demanded a greater proportion of the fund be composed of loans instead of grants. Ultimately, after four days of intense negotiations, a deal was grasped composed of EUR390bn of relief grants and a further EUR360bn of long-term loans, propelling EUR-USD above 1.15 for the first time since January 2019.  

Thereafter, the EUR continued climbing as US virus cases continued mounting and investors became more bullish on the likely speed of recovery in Europe compared to the US. Similarly, outperformance in European data such as the Eurozone unemployment rate for May, retail sales number for May and manufacturing PMI for June likely helped to solidify positive risk sentiment. The EUR had its best day for the month on 27 July when it climbed 0.8% against the USD as a wave of broader dollar weakness swept through the market ahead of the Federal Open Market Committee (FOMC) meeting. On 29 July, the EUR climbed a further 0.6% against the USD as the Federal Reserve (Fed) remained on hold and reiterated the uncertainties which remain around the pandemic. July was a strong month for the EUR, with EUR-USD climbing to its highest level since 2018. 

UK: Rishi to the Rescue

The GBP rose 5.5% in July alongside broader greenback weakness and despite an increase in geopolitical tensions. On 8 July, UK Chancellor Rishi Sunak pledged an additional GBP30bn of support to the UK economy in order to help various sectors recover from the COVID-19 induced recession. GBP-USD rose 0.5% on the day, albeit this was in line with a broader risk-on mood in markets. The GBP’s worst one-day performance came on 13 July where it depreciated 0.5% against the USD and 0.9% against the EUR. The move came amongst increasingly bullish sentiment relating to the Next Generation EU fund meeting but also a notable lack of progress in Brexit negotiations. Thereafter, the GBP climbed as broader weakness in the USD became dominant.  

Data throughout July was mixed with monthly GDP Data for May disappointing with a bounce of only 1.8% when a 5.5% increase was expected. Conversely, UK unemployment remained near record lows at 3.9% beating the consensus of 4.2%. Similarly, UK June CPI inflation data came in higher than expected with a 0.6% increase on a year-on-year basis. UK retail sales for June also bounced much more than expected and climbed 13.5% over the previous month. However, the direction of the GBP was largely determined by broader ‘risk-on’ sentiment rather than individual data releases.  

In Brexit, the GBP was relatively unfazed by the lack of progress in negotiations and shrugged off negative rhetoric from various EU speakers such as German Chancellor Merkel who said Germany was “preparing for no-deal on every level”. That said, on 22 July, reports that a US trade deal was unlikely to be completed by the end of the year and the increasing likelihood of ‘WTO Brexit’ withdrawal led to some brief GBP underperformance compared to other G10       currencies. Nevertheless, increasing geopolitical tensions with both Russia and China scarcely restrained the GBP, and the currency climbed above 1.31 against the USD for the first time since March. 

Japan: The “safe-haven” Yen

The JPY ended the month up 2% against the USD. However, during the first half of July, there was little movement in the currency, trading largely between 106.50 and 108, and the JPY never moved more than 0.5% against the USD. On 15 July, the Bank of Japan (BOJ) held its policy rate at -0.1% as expected, but USD-JPY fell 0.3% on the back of USD weakness. However, after the EU summit catalysed widespread USD weakness, the JPY appreciated markedly against the USD, with USD-JPY crossing below 105.  

On the data front, core machine orders for May were much better than expected, rising 1.7% when a decline of 5.0% had been expected. Likewise, industrial production numbers for June showed a monthly increase of 2.7% which indicated some signs of life in an economic rebound, albeit industrial production remained down 17.7% on a year-on-year basis.  

The continued demand for “safe-haven” assets, which resulted in gold hitting all-time highs, likely aided the JPY to climb higher. The biggest gain for the currency was on 27 July when it appreciated 0.7% against the USD as broad USD weakness and a continued demand for havens allowed the JPY to climb higher. 

China: Rising tensions

The CNY strengthened 1.3% against the USD in July. The broad rally in Chinese equities likely helped the CNY to climb higher. Notably, on 6 July, the CSI 300 Index had its best day in five years and this positive risk sentiment helped the CNY to appreciate 0.7% against the USD, and USD-CNY fell below the key 7.00 level for the first time since March. Thereafter, despite the broad USD weakness, USD-CNY traded largely sideways as mounting US-China tensions likely prevented further gains for the CNY. On 22 July, US-China tensions escalated, the USD-CNY pair rose by 0.3% on the day. Chinese Q2 GDP surprised to the upside on 16 July with an increase of 3.2% on a year-over-year basis, compared to a consensus of 2.4%. However, like most of FX, it was the global narrative of broad dollar weakness combined with shifting USChina tensions which drove movements in USD-CNY.  

Canada: The CAD climbs, but underperforms

USD-CAD ended July down 1.2%. The CAD largely followed the global narrative throughout the month; initially, the CAD was responsive to the ‘Vaccine On-Vaccine Off’ which in turn determined ‘Risk On-Risk Off’ (RORO). The biggest gain for CAD came on 15 July which coincided with the Bank of Canada (BOC) meeting where rates were left unchanged at 0.25% but Governor Macklem did state paring back QE would come before all spare capacity was absorbed. On the same day, the Canadian jobs report showed an increase of 953k and ‘risk-on’ sentiment had swept markets due to the positive vaccine news; USD-CAD fell 0.8% on the day. GDP data for May showed the Canadian economy expanded 4.5% over the previous month, albeit remained down 13.8% on a year-over-year basis. Through the rest of the month, the CAD continued its climb against the USD, albeit to a lesser extent than other G10 currencies, making it the underperformer against G10 outside the USD for July. 

Australia: Down under climbing higher

AUD-USD rose 3.5% over the month on the back of broadly positive sentiment. On 7 July, the Reserve Bank of Australia (RBA) held its cash rate target and 3-year yield targets unchanged at 0.25%. Despite comments from RBA Governor Philip Lowe that “the downturn has been less severe than expected”, bearish comments on the uncertainty of the recovery led to a 0.4% decline for AUD-USD on the day. On the data front, Australian retail sales for May bounced back 16.9% over the previous month and the 211k increase in employment significantly surprised to the upside, demonstrating the economic recovery from COVID-19 induced lockdowns was seemly underway. However, the weekly jobs data released towards the end of the month showed the early stage of the latest lockdown in Melbourne was clearly having a drag on employment. The currency pair had its best day on 21 July when it was lifted 1.6% on broad ‘risk-on’ sentiment which prevailed following the EU agreement. However, following the increase in US-China tensions and the increase in Australian COVID-19 cases which forced the lockdown of Victoria, the AUD struggled to climb higher. 

New Zealand: Global risk sentiment driven  

The NZD climbed in July and rose 2.7% against the USD, mainly driven by global risk sentiment. The best day for the NZD was 21 July when it appreciated 1.0% against the USD following the Next Generation Fund agreement. Like the AUD, however, deteriorating sentiment partially caused by the increase in tensions between the US and China led to the NZD paring some gains. 

Norway and Sweden: G10 outperformers

The SEK finished up 6.2% against the USD in July and was the best performer amongst the G10 currencies. The month began with a bang when the Riksbank surprised the market with an additional SEK200bn of QE and suggested that negative rates were not off the table. Despite the dovish tone, EUR-SEK finished the day flat as a broader ‘risk-on’ rally carried the currency higher. Notable data releases included seasonally-adjusted unemployment numbers released on 23 July showed an increase in the rate of unemployment to 9.2% despite Sweden’s alternative approach to controlling COVID-19. Like the NOK, however, the main determinant of the SEK’s outperformance was the bullish ‘risk-on’ sentiment which prevailed throughout July.  

The NOK climbed 5.8% against the USD in July (2nd best performer) and was propelled in tandem with the ‘risk-on’ sentiment which fuelled the rise in global equities. The NOK had its best day for the month on 15 July when it appreciated 1.3% against the EUR as positive vaccine news buoyed equity markets; the 2.1% increase in Brent prices likely aided the NOK’s rise. Following the agreement of EU leaders in mid-July, the NOK appreciated further against the EUR as traditional ‘risk-on’ currencies outperformed. On the data front, despite Norway having some of the most relaxed COVID-19 restrictions in the developed world, monthly GDP data still showed an increase of 2.4% despite disappointing expectations of 4.3%. Likewise, unemployment data on 23 July showed a rise to 4.6% against a consensus of 4.3%. That said, retail sales continued to show strength in the domestic economy rising 5.7% MoM in June. Nonetheless, data releases had only a minor effect on the NOK and movements in the currency were driven by global sentiment. 

Oil: Calming down?

Through July, oil prices stabilised compared to recent months. The largest one-day price swing for West Texas Intermediate (WTI) in July was minus 3.3%, as sentiment shifted following a sharp rise in US COVID-19 cases and bleak US and German economic data increased fears of a slower recovery. However, this was markedly smaller than the 8.2% decline in WTI prices seen in mid-June. Following the EU summit, crude prices posted their largest July one-day gain of 2.8% as more positive risk sentiment developed in the market. Thereafter, however, crude relinquished some gains as global virus cases and increasing US-China tensions began to weigh on market sentiment. Likewise, the Organization of the Petroleum Exporting Countries (OPEC) and its allies, a group known as OPEC+, announced that supply cuts would be tapered from August likely added to supply-side worries. Albeit, supply concerns abated somewhat on 29 July when the US Energy Information Administration (EIA) Crude Stocks Report was released; the consensus was for a crude build of 357k barrels, but a draw of 10.6m helped oil climb higher. WTI crude oil prices ended the month up 2.5%, and remained in a range between USD38.50 and USD42.50 per barrel. 

 Precious Metals: An all-time high for gold

Gold prices increased 10.9% in July. Gold climbed robustly throughout July, as investors continued to demand the haven asset amid a raft of global uncertainties. The only hiccup for gold came on 16 July following a brief period of risk-off sentiment and prices fell 0.7%, but losses were quickly recouped in the following days. With negative real interest rates, a weakening USD, renewed concerns over inflation, rising US-China tensions, and an increase in worldwide COVID-19 cases, demand for bullion has remained high. Thus, inflows into gold exchange-traded funds (ETF) continued to accumulate at a rapid pace. Consequently, gold prices continued to surge and on 27 July passed the previous nominal all-time high of USD1920 per ounce dating from September 2011. This was also the best day of gold for July, rising 2.1%. The rise in gold was so pertinent that gold prices declined on only 5 days throughout July. Gold ended the month on an all-time high of USD1983 per ounce. Elsewhere in commodities, silver had a stellar July, climbing 34%.  

* This report uses Bloomberg prices
** PEPP, a non-standard monetary policy measure, is a temporary asset purchase programme of private and public sector securities, initiated in March 2020 to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the coronavirus (COVID-19) outbreak. 

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