Key takeaways
- FX markets are seeing key differences in the tone and pace of G10 central bank exit strategies.
- In our view, the USD is likely to outperform most other G10 currencies in the coming weeks…
- …supported by relatively high yields and a patient Fed exit strategy, among other factors.
Our tactical view
Table of tactical views where a currency pair is referenced (e.g. USD/JPY):An up (⬆) / down (⬇) / sideways (➡) arrow indicates that the first currency quotedin the pair is expected by HSBC Global Research to appreciate/depreciate/track sideways against the second currency quoted over the coming weeks. For example, an up arrow against EUR/USD means that the EUR is expected to appreciate against the USD over the coming weeks. The arrows under the “current” represent our current views, while those under “previous” represent our views in the last month’s report.
USD
We look for further USD gains into July, buoyed by US economic resilience, still generous yields, and a patient exit strategy by the Federal Reserve (Fed). Markets are priced for a similar easing pace from the Fed, the European Central Bank (ECB), and the Bank of England (BoE) in 2H24, which creates upside USD risks, in our view. Besides, increased political risk for the EUR also poses upside risks to the USD. US inflation and labour market data (including PCE data for May (28 June), non-farm payroll data for June (5 July) and CPI data for June (11 July)) will remain the critical pinch points for Fed policy, thereby the USD.
Short-term direction : DXY^
Current
▲ Appreciate
Previous
▲ Appreciate
EUR
While the ECB cut in June, as expected, there was little sense of urgency in the policymakers’ rhetoric to suggest the door is realistically open to a follow-up cut at its 18 July ECB meeting. However, the surprise announcement of a general election in France (with the first round on 30 June and the run-off on 7 July) added political risk into the mix for the EUR, with a sharp widening in French government bond yields over their German equivalent. The likelihood is that European politics remains dominant over European economics in the coming weeks. We continue to look for EUR-USD downside in the weeks ahead.
Short-term direction : EUR-USD
Current
▼ Depreciate
Previous
▼ Depreciate
GBP
The Bank of England’s (BoE) June minutes suggested the decision to leave policy unchanged at 5.25% was a close call for some beyond the two dovish dissenters. We expect that further dovish evidence will be forthcoming in sufficient time for the 1 August meeting to deliver a cut. The UK CPI for June will be released on 17 July. Nonetheless, with an August rate cut still viewed as a coin toss, we think the balance of risks are to the downside for the GBP for now. We do not expect the result of the 4 July UK general election to have a big impact on the GBP.
Short-term direction : GBP-USD
Current
▼ Depreciate
Previous
▼ Depreciate
JPY
A rate hike by the Bank of Japan (BoJ) or an announcement of a significant reduction on bond purchases at its 30-31 July meeting should be supportive for the JPY in theory. However, with a generous level of yield differential, even if that differential is declining, USD-JPY is likely to be pushed slightly higher in the months ahead. While inward tourism has benefitted from a weak JPY, net foreign direct investment (FDI) has not and Japan’s exports remain lacklustre, probably acting as impediments to the currency. FX intervention looms as a threat, but perhaps not a potent one, given the glacial rise in USD-JPY. Looking further ahead, we await the Fed’s rate cut as a potential turning point for USD-JPY.
Short-term direction : USD-JPY
Current
▲ Appreciate
Previous
▲ Appreciate
CHF
With the outcome highly uncertain ahead of its 20 June meeting, the Swiss National Bank (SNB) delivered its second 25bp rate cut this year. The SNB’s symmetric FX sensitivity and ongoing political uncertainties should temper further CHF depreciation against the EUR. Against the more desirable “safe-haven” USD, backed by a patient Fed, the CHF is likely to lose its shine over the near term.
Short-term direction : USD-CHF
Current
▲ Appreciate
Previous
▶ Track Sideways
CAD
We still see little chance for USD-CAD to break out of its 2Q trading range of roughly 1.36 to 1.38. Data for May’s CPI will be released on 25 June, with consensus expecting a further slowdown in inflation. Markets are already fully priced for two more 25bp rate cuts by the Bank of Canada (BoC) this year, after it started the easing cycle at its 5 June meeting. For the CAD to weaken meaningfully, markets would need to contemplate three cuts in the remaining four Bank of Canada (BoC) meetings this year. The June minutes showed that policymakers agreed that rates cuts would “likely be gradual” (Bloomberg, 20 June 2024), suggesting three cuts in four meetings are unlikely.
Short-term direction : USD-CAD
Current
▶ Track Sideways
Previous
▶ Track Sideways
AUD
The AUD-specific drivers are not turning sustainably supportive. Growth in Australia’s iron ore and coal exports is highly dependent on China’s steel demand, which may not improve soon. Rate differentials are not particularly supportive, with a “restrictive-for-longer” stance looking more sustainable in the US. Elevated external uncertainty around elections could also weigh on the AUD. That being said, more supportive policy measures from China (amid the third Plenum) or a higher-than-expected Australia CPI inflation (with May data to be released on 26 June) could pose upside risks to our near-term bearish view for AUD-USD.
Short-term direction : AUD-USD
Current
▼ Depreciate
Previous
▶ Track Sideways
NZD
Fundamentals remain exceptionally weak for the NZD. The recent speech by Chief Economist Conway (Bloomberg, 19 June 2024) suggests that a dovish message looks unlikely at the 10 July Reserve Bank of New Zealand (RBNZ) meeting. A downside surprise in 2Q CPI on 17 July could see further dovish repricing by markets. Risks are asymmetrically skewed towards a larger reaction on a downside surprise. Any hawkish repricing of the RBNZ’s policy trajectory could be limited by growth concerns. Externally, a strong USD should see markets rotating away from long NZD carry trades, weighing on the NZD over the near term.
Short-term direction : NZD-USD
Current
▼ Depreciate
Previous
▶ Track Sideways
Note: ^DXY = US Dollar Index, is an index (or measure) of the value of the USD against major global currencies, including the EUR, JPY, GBP,CAD, SEK and CHF. Source: HSBC
Explanation of terms
FX Data Snapshot
| FX |
Spot |
200 dma |
1-month % change* |
Support |
Resistance |
|---|---|---|---|---|---|
| DXY |
105.78 | 104.49 | 1.01% | 105.24 | 105.93 |
| EUR-USD |
1.0699 |
1.0790 | -1.36% | 1.0660 | 1.0740 |
| GBP-USD |
1.2647 | 1.2558 | -0.71% | 1.2602 | 1.2744 |
| USD-JPY |
159.71 | 150.41 |
1.74% | 158.33 | 160.00 |
| USD-CHF |
0.8935 | 0.8892 | -2.32% | 0.8876 | 0.9035 |
| USD CAD |
1.3690 | 1.3586 |
0.19% | 1.3587 | 1.3710 |
| AUD-USD |
0.6642 | 0.6553 | 0.21% | 0.6585 | 0.6772 |
| NZD-USD |
0.6114 | 0.6067 | -0.11% | 0.6004 | 0.6155 |
| FX |
DXY |
|---|---|
| Spot |
105.78 |
| 200 dma |
104.49 |
1-month % change* |
1.01% |
| Support |
105.24 |
| Resistance | 105.93 |
| FX |
EUR-USD |
| Spot |
1.0699 |
| 200 dma |
1.0790 |
1-month % change* |
-1.36% |
| Support |
1.0660 |
| Resistance | 1.0740 |
| FX |
GBP-USD |
| Spot |
1.2647 |
| 200 dma |
1.2558 |
1-month % change* |
-0.71% |
| Support |
1.2602 |
| Resistance | 1.2744 |
| FX |
USD-JPY |
| Spot |
159.71 |
| 200 dma |
150.41 |
1-month % change* |
1.74% |
| Support |
158.33 |
| Resistance | 160.00 |
| FX |
USD-CHF |
| Spot |
0.8935 |
| 200 dma |
0.8892 |
1-month % change* |
-2.32% |
| Support |
0.8876 |
| Resistance | 0.9035 |
| FX |
USD CAD |
| Spot |
1.3690 |
| 200 dma |
1.3586 |
1-month % change* |
0.19% |
| Support |
1.3587 |
| Resistance | 1.3710 |
| FX |
AUD-USD |
| Spot |
0.6642 |
| 200 dma |
0.6553 |
1-month % change* |
0.21% |
| Support |
0.6585 |
| Resistance | 0.6772 |
| FX |
NZD-USD |
| Spot |
0.6114 |
| 200 dma |
0.6067 |
1-month % change* |
-0.11% |
| Support |
0.6004 |
| Resistance | 0.6155 |
Note: *As at 14:08 HKT on 24 June 2024.
Source: HSBC, Bloomberg
Spot: Spot refers to the current market price of a currency pair that is important for immediate transactions.
200 dma: 200-day simple moving average numberrepresents the average price of an index or a currency pair over the past 200 days.
Support (S), Resistance (R):Support and resistance are significant previous lows and highs plus retracement levels, based on historical price patterns of anindex or a currency pair. Support is a historical price level where a downtrend of a currency pair paused due to demand for the first currency quoted in the pair increasing, while resistance is a historical price level where an uptrend of a currency pair reversed amid demand for the second currency quoted in the pair increasing.
HSBC Positioning Indices
The indicators have been devised to track the net position of momentum traders, looking at hundreds of strategies, operating over many different time horizons. It considers time horizons of 5 days up to 260 days. An indicator level of +10 would indicate that the hundreds of different strategies have all lined up and gone long (i.e., buy the first currency quoted in the pair). Similarly, an indicator level of -10 indicates that all strategies are short (i.e., sell the first currency quoted in the pair).
Glossary
Dovish
Dovish refers to an economic outlook which generally supports low interest rates as a means of encouraging growth within the economy.
Hawkish
Hawkish is typically used to describe monetary policy which favours higher interest rates, and tighter monetary controls to keep inflation in check.
MoM / YoY
Month on month / Year on year
PMI
Purchasing Managers Index (PMI) is an indicator of economic health of the manufacturing sector (>50 represents expansion vs. the previous month).
IMM data
International Monetary Market (IMM) is a division of the Chicago Mercantile Exchange (CME) that deals with the trading of currencies and interest rate futures and options and the IMM data is part of the Commitments of Traders (COT) reports published by the U.S. Commodity Futures Trading Commission (CFTC). The IMM data provides a breakdown of each Tuesday’s open futures positions on the IMM. Speculative positions are a trader’s non-commercial positions (i.e. not for hedging purposes).
G10
G10 refers to the most heavily traded, liquid currencies in the world: USD, EUR, JPY, GBP, CHF, AUD, NZD, CAD, NOK, and SEK.
Fed / FOMC
Federal Reserve System (US’s Central Bank)/Federal Open Market Committee.
ECB
European Central Bank (Eurozone’sCentral Bank).
BOE
Bank of England (UK’s Central Bank).
BOJ
Bank of Japan (Japan’s Central Bank).
BOC
Bank of Canada (Canada’s Central Bank).
RBA
Reserve Bank of Australia (Australia’s Central Bank).
RBNZ
Reserve Bank of New Zealand (New Zealand’s Central Bank).
SNB
Swiss National Bank (Switzerland’s Central Bank).
Lagarde
Christine Lagarde, President of the European Central Bank (ECB).
Powell
Jerome Powell, Chair of the Board of Governors of the Federal Reserve System (Fed).
Bailey
Andrew Bailey, Governor of the Bank of England (BOE).
Kuroda
Haruhiko Kuroda, Governor of the Bank of Japan (BOJ).
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