Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: And now onto today's show.
Speaker: The following podcast was recorded for publication on the 7th of September 2023 by HSBC Global Research.
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Speaker: Hello, I'm Piers Butler in London and welcome to the Macrobrief.
Speaker: We're focusing on the currency markets in this week's program and the US dollar in particular.
Speaker: The greenback has staged somewhat of a comeback over the past month and as US timing begins to bite and global growth stalls, we're asking, can the dollar continue to rise?
Speaker: So let's get started.
Speaker: Paul Mackel is Global Head of FX Research and he's here with me in the studio.
Speaker: Paul, welcome.
Speaker: Thank you very much.
Speaker: So Paul, you've had a weak dollar stance since early November 2022.
Speaker: And if I recall correctly, there were two phases to it.
Speaker: Firstly, a sharp weakness.
Speaker: then consolidation, and then an expectation of further weakness or further depreciation.
Speaker: But as the saying goes, if the facts change, you reserve the right to change your forecast.
Speaker: And the economic outlook has turned out somewhat differently than the consensus was expecting.
Speaker: I mean, at the start of the year, we thought the US, a lot of people thought that the US was going to go into recession and that China was going to rebound.
Speaker: But that's not been the case.
Speaker: Is that what's behind your change?
Speaker: Well, it's very much part of the story.
Speaker: So when we started 2023, we felt that, as you mentioned, that the dollar would be in this holding pattern after staging such a significant fall late last year.
Speaker: And that indeed has been playing out.
Speaker: The dollar has been fairly range bound.
Speaker: There's been a tug of war of drivers.
Speaker: On the one hand, risk appetite has been pretty buoyant.
Speaker: Usually that coincides with the weaker dollar.
Speaker: On the other hand, the yield advantage that's behind the dollar has been very supportive,
Speaker: versus many other currencies.
Speaker: But if you overlay on top of what you just said about concerns, say on the outlook for the China economy, Chinese economy that is, that's certainly been playing into this recent dollar strength.
Speaker: And we can't ignore that because it's not just about China.
Speaker: It's also been some gloomy signs elsewhere.
Speaker: So if I look at your report, you mentioned that with respect to the Chinese currency, depreciation could be seen both as a consequence of economic weakness, but perhaps part of the solution.
Speaker: And by that, what we're talking about is that the currency weakens, exports pick up, the economy recovers, and therefore the currency strengthens.
Speaker: I'm slightly oversimplifying, but is that what we can expect from China?
Speaker: Well, in theory, that's how it should be playing out.
Speaker: And we're so accustomed to think alongside orthodox policy choices.
Speaker: But on the other hand, the Chinese authorities have been very clear lately that they want to anchor their currency.
Speaker: So they're keeping it on a stronger position versus the dollar.
Speaker: And I think, as I said, there's some signaling there that there could be not necessarily a clear benefit through the export channel, particularly when the global trade cycle is suppressed.
Speaker: So to try and get a competitive boost through your exchange rate may not be an obvious solution.
Speaker: So for now...
Speaker: It's an uneasy balance.
Speaker: The currency has been facing pressure for the right reasons, fundamental reasons.
Speaker: But where do we go from here?
Speaker: Well, I still like to err a little bit more on the optimistic side that the economy will stabilize, but it's not going to be an easy choice when the outlook for the dollar is still a healthier one through next year.
Speaker: And it's fair to say that we've seen a number of initiatives from the Chinese authorities in that respect?
Speaker: Absolutely.
Speaker: There's been a drip feeding of policy measures for the last couple of months.
Speaker: I wouldn't say it's really leading into quite a sustained improvement in confidence, thinking about the currency.
Speaker: If the authorities, as I said, are sending strong signals to the market day after day after day, that they would like it to be stronger than where it should be up to the market view of sorts, then again, there's a bit of a disconnect there.
Speaker: The confidence hasn't fully arrived when we're thinking about the outlook for the renminbi, at least in the very near term.
Speaker: Now, closer to home, it's fair to say that another fact is that neither the UK or Europe have really picked up the slack in terms of economic momentum.
Speaker: Is that also a factor in your outlook?
Speaker: Definitely.
Speaker: When we go back to the beginning of the year, we felt that the outlook for the British pound and euro would be relatively positive.
Speaker: There would be a cyclical upturn for both currencies because the economies were doing better.
Speaker: There was a sense of happier disinflation developing and the central banks were still committed in terms of raising interest rates.
Speaker: So it was a good growth inflation mix, which was helping those currencies to even outperform the US dollar.
Speaker: But we know that the data pulse, mainly in the Eurozone, has been tipping over quite quickly versus expectations, again, compared to the last few months, in contrast to the US.
Speaker: And we can't ignore that fact.
Speaker: It would be wrong to think that the Euro can keep on defying gravity.
Speaker: And if the strong dollar is going to persist, then it makes sense to consider that the outlook for the Euro will indeed be a weaker one, at least over the next 12 to 15 months.
Speaker: Okay, so I believe you, the king dollar is back, but for how long?
Speaker: Well, we hadn't initially fleshed out our view for the second half of 2024, but we are doing it now.
Speaker: And we think that this strong dollar is going to persist.
Speaker: As I mentioned, it's been pretty range bound, but the longer term trend we believe is one for strength.
Speaker: The consensus has a different view.
Speaker: Some of them have been arguing that the dollar would be strong for the next few months, then it would stop and do nothing, and then would go down thereafter.
Speaker: So they're almost calling every scenario possible for the US dollar.
Speaker: But still, what's interesting for 2024, the consensus largely believes that the dollar is going to weaken.
Speaker: We have a different view.
Speaker: It's about global growth at risk to softening further.
Speaker: The Fed clearly being in a position where they're not looking to cut interest rates soon.
Speaker: And on the other hand, it could be that we have to consider other central banks.
Speaker: The market has to discount more rate cuts.
Speaker: That all plays into this stronger dollar view.
Speaker: Okay, let me throw you a curveball.
Speaker: What if the Fed pauses?
Speaker: What we've seen in the past, it doesn't always mean that the dollar goes down.
Speaker: Some periods, yes, a Fed pause did coincide with dollar weakness.
Speaker: I mean, the last episode which saw this scenario was in 2006 to 2007.
Speaker: But then there was a very strong
Speaker: global growth backdrop associated with emerging markets.
Speaker: Some central banks were very much still in a hawkish stance like the European Central Bank.
Speaker: So the dollar was in a vulnerable state during that episode.
Speaker: Other periods, as I said, have been very inconsistent.
Speaker: And even if the Fed starts cutting, by the way, later next year,
Speaker: It doesn't mean that the dollar should be going down because other central banks could be doing the same.
Speaker: And with that yield advantage, as I said, it could keep the dollar in a stronger state.
Speaker: And that's very much our central view.
Speaker: So let's cover a couple of other key currencies.
Speaker: Firstly, the yen.
Speaker: There's been a shift in stance by the Bank of Japan.
Speaker: It's about yield curve control.
Speaker: Firstly, explain that to our listeners because it's perhaps a slightly unusual concept.
Speaker: And then go on to the change in stance by the BOJ.
Speaker: So the Bank of Japan adopted yield curve control in September 2016 and is very much a part of an unorthodox policy stance to try and constrain or cap how high JGB yields could go.
Speaker: And that was associated with, as I said, unconventional policies.
Speaker: But what's been changing since December last year as inflationary pressures have been rising in the economy?
Speaker: Well, the central bank is thinking differently about yield curve control.
Speaker: And they've been making step changes and allowing more flexibility in JGB yields.
Speaker: But it doesn't really change the big picture that the Bank of Japan is still
Speaker: and a very dovish state compared to other central banks that have been so hawkish.
Speaker: And in that context, the yen has weakened, but we don't see much of a recovery unfolding, at least for the next few months with this strong dollar backdrop.
Speaker: It could be that later next year that the yen stages a modest, a very mild recovery if central banks are loosening monetary policy, but it'd be very modest indeed.
Speaker: Finally, the Aussie dollar.
Speaker: Is it the most affected by the lack of rebound in China?
Speaker: Is that the key factor behind your outlook for that currency?
Speaker: It's definitely an important part of the story, undoubtedly.
Speaker: Many of us for years have looked at the Aussie dollar as being a China proxy, but there are clearly other reasons why that the currency has been underwhelming.
Speaker: First of all, the central bank hasn't been as hawkish as maybe some other ones, whether it was the Bank of England or the Fed or the ECB.
Speaker: But similarly, this strong dollar development in the last month or so has also been a contributing factor seeing this currency
Speaker: underperform.
Speaker: The outlook for it, though, I think is still going to be a challenging one.
Speaker: Again, it's a combination of a pretty tricky mix, big uncertainty still in China, and we have that king dollar persisting.
Speaker: What about just expanding into the rest of Asia?
Speaker: Are these similar factors there?
Speaker: Short answer is yes.
Speaker: There's a lot of other currencies that are very sensitive to how China's economy performs.
Speaker: It's not just the Australian dollar.
Speaker: So in the Asia space or the EM space, who stands out?
Speaker: It's the likes of the Korean won, the Taiwan dollar, the Singapore dollar.
Speaker: A lot of those currencies in Asia are very sensitive to not only how the renminbi moves, but especially through the export channel.
Speaker: And if China's economy is still stuck in a slower gear, it's going to keep these currencies, as I said, in a tricky spot.
Speaker: So, Paul, to finish and to come back to where we started, what triggered the change and what are your forecasts?
Speaker: Well, hopium is a very false investment strategy to follow.
Speaker: But it was always this sense of belief that maybe more of the bad news was getting in the price for economies in Europe and also China.
Speaker: But we keep waiting for that train to arrive.
Speaker: It's not happening.
Speaker: And the U.S. economy is still looking pretty resilient.
Speaker: And the Fed message is loud and clear that they're not going to be cutting anytime soon.
Speaker: So it does play into this thinking that the dollar could indeed be stronger for longer.
Speaker: Now, when it comes down to the forecast, you know, through the rest of this year, we're talking about very modest appreciation still because
Speaker: in the last month or so, it's been pretty robust.
Speaker: We have euro coming down to 1.05.
Speaker: We have sterling dollar being down at 1.23.
Speaker: And for the Chinese renminbi, we still have it hovering around about 7.3.
Speaker: But for the end of next year, again, fleshing out the forecast, we would believe that euro could head down very gradually to something like 1.02.
Speaker: So getting closer to parity again, cable sterling dollar back at 1.18.
Speaker: And the Chinese renminbi might get a little bit of recovery if the economy can stabilize with additional measures to something like 7.2.
Speaker: But overall, as I said, strong dollar.
Speaker: It's going to be very difficult to go against it in our thinking.
Speaker: So you heard it from Paul.
Speaker: The king dollar is back.
Speaker: Paul, thank you very much for joining us.
Speaker: Thank you very much.
Speaker: Paul Mackel there on why he thinks the dollar is going to strengthen.
Speaker: Paul is a regular poster on LinkedIn, so please follow him there to get his latest updates.
Speaker: A few quick things just to finish with.
Speaker: The next edition of our Live Insights series is nearly upon us.
Speaker: On the 12th of September, I'll be sitting down with Murat Olgun, Global Head of Emerging Markets Research, to ask him your questions on all things emerging markets.
Speaker: Go to the HSBC Global Banking and Markets page on LinkedIn to find all the details.
Speaker: Second, our global emerging markets forum is fast approaching.
Speaker: It's taking place online from the 18th to the 29th of September, and there are lots of panel discussions to listen to.
Speaker: So if you're an HSBC client and would like to attend, please get in touch with your HSBC sales representative.
Speaker: And finally, don't forget that you can follow the podcast on Apple and Spotify or wherever you get your podcasts by searching for the Macro Brief.
Speaker: So that's all from us.
Speaker: Thanks for listening to the macro brief.
Speaker: We'll be back next week.
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Speaker: We hope you enjoyed the discussion.
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