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The Macro Brief – A conversation about currencies
38 Plays11 months ago
We catch up with Paul Mackel, Global Head of FX Research, to find out how the latest financial and political developments are affecting the major currencies.
Disclaimer: https://www.research.hsbc.com/R/101/pskbcwv
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Transcript
Podcast Introduction and Subscription Info
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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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Make sure you're subscribed to stay up to date with new episodes.
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Thanks for listening.
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And now onto today's show.
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This podcast was recorded for publication on 20th June 2024 by HSBC Global Research.
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All the disclosures and disclaimers associated with it must be viewed on the link to Actual Media Player.
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And don't forget that you can subscribe to this weekly podcast on Apple and Spotify, or wherever you get your podcasts.
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Just search for The Macro Brief.
2024 Election Impacts on Markets
00:00:45
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Hello and welcome to the Macrobrief.
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I'm Piers Butler in London.
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We all know 2024 is a bumper year for elections, with potential implications for markets and assets worldwide, not least currencies.
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As we head towards the halfway point of the year, with many polls behind us, but more still to come, our focus today is foreign exchange.
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I'm joined by Paul Mackel, Global Head of FX Research.
00:01:09
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Paul, welcome to the podcast.
00:01:11
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Thank you very much.
US Dollar Resilience and Market Positioning
00:01:12
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So, Paul, you just published your monthly currency outlook in the last one.
00:01:18
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You talked about how the trend in U.S. activity data was stalling and how that was potentially a challenge to the strong dollar view that you've held since last September.
00:01:29
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But it feels like, from what you're saying now, that we've come through that and that King Dollar has reasserted itself.
00:01:34
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That's right.
00:01:35
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If we go back to nearly a month or so ago, we were thinking that the dollar was
00:01:40
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hitting a wall of fatigue.
00:01:42
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There were a number of things that were going on.
00:01:44
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There had been a lot of rate cuts taken out by the market for the Federal Reserve.
00:01:48
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So there was a lot of fair pricing, in other words, compared to where we were at the beginning of this year.
00:01:54
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And as you mentioned, when we're thinking about US growth data, a lot of the numbers were surprising to the downside and very quickly,
00:02:01
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from late April through the early part of June.
00:02:06
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So the combination of those features, I think, was very much the setup to work against the dollar and it was being challenged, at least temporarily.
00:02:14
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But we feel like we've been coming through some of those negativities, in part the way that data in the United States
00:02:20
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appears to be showing perhaps some signs of stabilizing, again, versus expectations.
00:02:26
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The positioning in the market is certainly lighter.
00:02:29
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They're not as long the US dollar as what they were a couple of months ago.
00:02:33
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And coming back to the Federal Reserve messaging, it's still one of that they're not looking to cut anytime soon.
00:02:40
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So with those yields still being quite high and supportive of the US dollar, we think that this dollar stability should begin to reassert itself.
Euro and Sterling: Effects of Upcoming Elections
00:02:48
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So on this side of the Atlantic, it's sort of election fever time.
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We've got the first round of the French elections, parliamentary elections coming up.
00:02:57
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Then we have the UK general election and then the second round of the French elections.
00:03:01
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I mean, how much of that is factored into the respective currencies, sterling and the euro?
00:03:08
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Well, it's a good question.
00:03:09
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I mean, we've had a lot of surprising election outcomes lately in the emerging world, whether in India and South Africa and also Mexico.
00:03:16
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And then the sudden announcement of a snap of French election has taken the FX market by surprise.
00:03:23
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I don't think we can confidently say that it's all in the price.
00:03:26
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I still think that there's some sensitivity in terms of how polls could be playing out in the next couple of weeks.
00:03:32
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On top of that, when we're thinking about the risks of fiscal slippage, that matters clearly not only for the currency market, but other markets too.
00:03:42
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So we're paying quite close attention to see, for example, how do the European bonds perform in the coming weeks.
00:03:48
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That could be guiding us in terms of what could happen to the euro.
00:03:52
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For something like Sterling, we believe it might be a different situation.
00:03:56
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The opinion polls have been pointing towards a Labour outcome for some time.
00:04:01
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But irrespective of that, what we've looked at in the past is that Sterling doesn't take too much of a reaction or does not show much of a reaction to the election outcome of
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whether it's a Labour or Conservative government.
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In other words, it's about the fundamentals mattering more.
00:04:17
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And narrowing that down specifically, it comes down to yields.
00:04:21
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And those yields for sterling are still comparatively quite high compared to other currencies.
00:04:26
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And that is very much keeping the British pound in a sturdy position for now.
Bank of England's Rate Decisions and Sterling
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And indeed, Paul, we've just had the Bank of England leaving its policy rates unchanged.
00:04:36
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That's right.
00:04:37
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But they also had their votes staying at seven to two.
00:04:40
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So in other words, there's most of the MPC don't believe a rate cut is warranted at this juncture.
00:04:46
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That said, some of the language had changed in the statement.
00:04:49
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Some of the members were arguing that it's becoming finely balanced towards cutting interest rates.
00:04:55
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Now, the House view from HSBC economics is that could occur in August.
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That's the case.
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We think that could start to chip away at Sterling's prominent position that it's had this
Yen Challenges and Recovery Prospects
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year.
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So let's go east now, Paul.
00:05:09
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Looking at the sections on the yen and the renminbi in your latest currency outlook, they're entitled snail's pace and glacial, which doesn't sound very promising.
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So maybe let's talk about the yen and Japanese monetary policy.
00:05:27
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What prompted that sort of rather disheartening title?
00:05:30
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Well, that currency has been facing a number of headwinds, but when we're in a low volatility environment,
00:05:36
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and we're thinking about the high yields outside of Japan, it's been very much a potent headwind against the Japanese currency.
00:05:44
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And that's been an ongoing story for the last couple of years.
00:05:47
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And the depreciation has been slow and steady.
00:05:51
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And we think that that's probably going to remain the case, at least over the next few months.
00:05:57
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So I think that the issue, of course, for the Japanese yen is the messaging from the Bank of Japan
00:06:03
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It's also very slow in measure that they don't want to be rushing to normalize monetary policy too quickly.
00:06:10
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So it keeps that yield differential working against the Japanese yen.
00:06:14
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We do think in the longer term perspective that will change.
00:06:17
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The fortunes will change for the currency and it'll begin to stabilize.
00:06:20
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But that could still take a number of months.
00:06:22
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We're waiting for other central banks to start to become more comfortable with lowering their monetary policy rates, giving firmer guidance about how that can proceed over the next couple of quarters.
00:06:33
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When that happens, as I said, I think that can play into some stability and recovery very modestly for the Japanese yen.
Renminbi's Weakness and Policy Speculations
00:06:40
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And turning to China, you would have thought there would be more of a sense of urgency given the sluggish state of the economy.
00:06:46
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I mean, the plenum is coming up next month.
00:06:48
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Could that have an impact?
00:06:49
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Well, we always have to pay close attention to these high-level policy-type meetings in case that bolder stimuli, policy stimuli, is unveiled.
00:07:00
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Now, the market has been thinking about this for quite some time.
00:07:04
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And of course, it's been fairly kind of cautious in terms of anticipating how much extra stimulus could be forthcoming.
00:07:12
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But similar to the Japanese yen, when you have these low yields for the Chinese renminbi, it's a potent headwind for that currency too.
00:07:21
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And that's what I think is still seeing some modest weakness playing out for the Chinese renminbi over the next few months.
00:07:29
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On top of that, when we track cross-border flows, we can also see the demand for foreign currency has remained fairly strong.
00:07:37
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And I think part of that is related to what I was saying on the higher yields offered for other currencies.
00:07:43
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And finally, on the Aussie dollar pool, you say in your report that there is a sizable short position against the currency.
Australian Dollar and Potential Changes
00:07:50
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What are the factors that could reverse that, given that the central bank there has left its cash rate and its policy guidance largely unchanged?
00:08:01
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Well, there's a couple of scenarios.
00:08:02
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The first is associated with the Reserve Bank of Australia's messaging.
00:08:06
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Now, indeed, they're telling us that they're not rushing to cut interest rates anytime soon.
00:08:11
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The risk actually exists that maybe they may have to tighten.
00:08:15
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If that were the case, then that could certainly be quite positive for the currency.
00:08:21
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The second thing would be more associated with the external backdrop.
00:08:25
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Let's imagine that something very positive did happen from the plenum in China.
00:08:30
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You'd have to think with regards to a proxy story for the Chinese or MIMBY, such as the Australian dollar, it would be poised to benefit too.
00:08:37
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So those are a couple of scenarios that one would have to think about.
00:08:41
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Well, Paul, thank you very much for this world tour of currencies.
Global Political and Economic Insights
00:08:45
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And we will, I'm sure, be talking to you again after these various elections.
00:08:50
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Thank you very much.
00:08:55
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Before we go, here are a few other highlights from the global research team this week.
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South Africa's political landscape has shifted dramatically following the national elections.
00:09:05
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The African National Congress lost its parliamentary majority and has now formed the government of national unity with other parties.
00:09:13
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David Faulkner, our chief economist for South Africa, says that this could be positive for the economic outlook.
00:09:20
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Although the country faces strong headwinds, David says that the prospect of rising confidence and more reform momentum suggests potential upside for longer term potential growth.
00:09:31
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In Asia, our chief economist for India and Indonesia, Pranjal Bhandari, has introduced a new Indonesia growth tracker tool, which we believe will help identify turning points in the economy.
00:09:42
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So what will affect the growth outlook?
00:09:45
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Pranjal identifies three factors.
00:09:47
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Global commodity price swings still matter a lot.
00:09:51
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Rate cuts may not help as much as in the past.
00:09:55
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And government spending helps, but only if it stays within limits.
00:09:59
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And finally, we've had a few central bank decisions this week.
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As we mentioned earlier, the Bank of England have kept rates on hold, as did the Norgous Bank.
00:10:07
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But in Switzerland, the S&B cut by 25 basis points, as forecasted by HSBC economist Shantana Sam, who, of course, was a guest on this podcast just last week.
00:10:19
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For more information on anything we've discussed on today's podcast, please email artsresearch at hsbc.com.
Conclusion and Call to Subscribe
00:10:29
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So that's all we've got time for today.
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Thanks very much for listening to The Macrobrief.
00:10:32
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We'll be back again next week.
00:10:57
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Thank you for joining us at HSBC Global Viewpoint.
00:11:01
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We hope you enjoyed the discussion.
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