Key takeaways
- The USD decline looks overdone relative to US rates which, in turn, also seems overly dovish.
- A paring back of Fed rate cut expectations should see the USD recover some lost ground …
- … but the impact on other currencies may depend on whether this is viewed as a “risk on” or “risk off” development.
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
After the challenging past two months, we look for a recovery in the USD during September. We believe that it is premature for markets to price in US economic weakness, particularly one extending to a US recession scenario. US employment report for August, out on 6 September, and August CPI, out on 11 September could be critical to market expectations, the Federal Reserve’s (Fed) 17-18 September meeting and the USD. Markets expect the Fed to cut at least 25bp in September, with an about 40% chance of 50bp cut (Bloomberg, 23 August 2024), which our economists’ base case is a 25bp cut. This could pose upside risks to the USD, especially because the recent USD decline may have been overdone relative to rates.
Short-term direction : DXY^
Current
▲ Appreciate
Previous
▲ Appreciate
EUR
EUR-USD has broken through the December 2023 high and is now looking towards the June 2023 high of 1.1276. We are not convinced that an extension above this level is warranted, but any pullback will be modest, given the lack of scope for a dovish surprise from the European Central Bank (ECB). Markets are pricing in a 25bp cut at the 12 September meeting, a view we endorse. The Eurozone’s increasingly unhealthy weak growth/sticky inflation mix is not an immediate impediment to the EUR but may pose downside risks over the medium term.
Short-term direction : EUR-USD
Current
▶ Track Sideways
Previous
▼ Depreciate
GBP
The GBP strength is looking overdone relative to rate differentials, probably because of its positive relationship with risk appetite. However, this will likely leave the GBP vulnerable in the coming weeks to any retreat in US rate cut expectations via both rates and risk appetite channels. Not all elements pose downside risks to the GBP. For example, the UK’s economic activity surprise index began to move higher again in August. Market pricing for the Bank of England’s easing path also looks plausible, with about 45bp of rate cuts by end-2024 and an about one-in-four chance for a rate cut at its 19 September meeting (Bloomberg, 23 August 2024).
Short-term direction : GBP-USD
Current
▼ Depreciate
Previous
▶ Track Sideways
JPY
There has been a sizeable adjustment lower in USD-JPY, one which we believe has run its course for now. Much of the upward move in USD-JPY may come from a less dovish pricing for Fed policy rates, rather than Japanese developments. A potential change in the leadership of Japan’s ruling Liberal Democratic Party (and by extension, the prime minister) looms at the end of September, but it is unlikely to get much traction in FX for now. The Bank of Japan’s meeting on 20 September should be a non-event after July’s excitement.
Short-term direction : USD-JPY
Current
▲ Appreciate
Previous
▲ Appreciate
CHF
The CHF strength may have gone too far, too fast for now, which could be a concern to the Swiss National Bank (SNB) especially if domestic inflation continues to slow more than expected. The end of the SNB’s easing cycle may be near (with our economists expecting just one final 25bp reduction at the 26 September meeting), but the exchange rates appear to have more than reflected that. All in all, we look for a further retracement higher in USD-CHF and EUR-CHF in the coming weeks.
Short-term direction : USD-CHF
Current
▲ Appreciate
Previous
▲ Appreciate
CAD
For the Bank of Canada (BoC) meeting on 4 September, we believe markets seem to be correct to price in a 25bp cut, given the continued broad deceleration in inflation, and further signs of some softness in the Canadian labour market. However, the CAD has strengthened by more against the USD than would be consistent with the prior relationship between FX and the rate differential. As such, the CAD appears to be vulnerable in the coming weeks to any hawkish shift in Fed expectations that might undermine risk appetite or support the broad USD.
Short-term direction : USD-CAD
Current
▲ Appreciate
Previous
▼ Depreciate
AUD
In our view, further AUD strength will likely hinge whether the backdrop of US soft-landing will extend or not., while a hawkish Reserve Bank of Australia (RBA) who will meet on 24 September will probably offer downside protection. The prospect of a “restrictive-for-longer” RBA is not overly subscribed by markets which have fully priced in one 25bp rate cut by year-end, while our economists expect the first RBA cut in 2Q25.
Short-term direction : AUD-USD
Current
▲ Appreciate
Previous
▼ Depreciate
NZD
Slowing macro tailwinds for the NZD may expose domestic headwinds, in our view. The Reserve Bank of New Zealand (RBNZ) started its easing cycle in August, with a 25bp cut, when the central bank had considered cutting by 50bp. With leading indicators for domestic growth outlook still broadly negative, risks are skewed towards a fast-moving RBNZ and front-loaded headwinds for the NZD. The incoming RBNZ meeting will be on 9 October.
Short-term direction : NZD-USD
Current
▶ Track Sideways
Previous
▼ Depreciate
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 |
100.75 | 104.00 | -3.42% | 100.50 | 102.00 |
| EUR-USD |
1.1170 | 1.0851 | 3.23% | 1.1000 | 1.1200 |
| GBP-USD |
1.3234 | 1.2701 | 2.89% | 1.3050 | 1.3300 |
| USD-JPY |
144.88 | 151.22 |
-5.93% | 143.45 | 149.40 |
| USD-CHF |
0.8468 | 0.8838 | -4.45% | 0.8415 | 0.8577 |
| USD CAD |
1.3467 | 1.3591 | -2.77% | 1.3400 | 1.3500 |
| AUD-USD |
0.6782 | 0.6612 | 3.56% | 0.6700 | 0.6800 |
| NZD-USD |
0.6223 | 0.6095 | 5.91% | 0.6200 | 0.6300 |
| FX |
DXY |
|---|---|
| Spot |
100.75 |
| 200 dma |
104.00 |
1-month % change* |
-3.42% |
| Support |
100.50 |
| Resistance | 102.00 |
| FX |
EUR-USD |
| Spot |
1.1170 |
| 200 dma |
1.0851 |
1-month % change* |
3.23% |
| Support |
1.1000 |
| Resistance | 1.1200 |
| FX |
GBP-USD |
| Spot |
1.3234 |
| 200 dma |
1.2701 |
1-month % change* |
2.89% |
| Support |
1.3050 |
| Resistance | 1.3300 |
| FX |
USD-JPY |
| Spot |
144.88 |
| 200 dma |
151.22 |
1-month % change* |
-5.93% |
| Support |
143.45 |
| Resistance | 149.40 |
| FX |
USD-CHF |
| Spot |
0.8468 |
| 200 dma |
0.8838 |
1-month % change* |
-4.45% |
| Support |
0.8415 |
| Resistance | 0.8577 |
| FX |
USD CAD |
| Spot |
1.3467 |
| 200 dma |
1.3591 |
1-month % change* |
-2.77% |
| Support |
1.3400 |
| Resistance | 1.3500 |
| FX |
AUD-USD |
| Spot |
0.6782 |
| 200 dma |
0.6612 |
1-month % change* |
3.56% |
| Support |
0.6700 |
| Resistance | 0.6800 |
| FX |
NZD-USD |
| Spot |
0.6223 |
| 200 dma |
0.6095 |
1-month % change* |
5.91% |
| Support |
0.6200 |
| Resistance | 0.6300 |
Note: * as at 19:42 HKT on 27 August 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).
Related insights
FX Viewpoint: USD: Markets debate a soft vs hard US landing
Markets are debating a soft vs hard landing in the US...[26 Aug]
FX Viewpoint: USD: A sustained decline?
The US Dollar Index is down almost 3% quarter-to-date…[19 Aug]
FX Viewpoint: AUD and JPY: Central banks’ policies vs risk appetite
The RBA delivered a hawkish hold on 6 August, and the BoJ unexpectedly hiked rates to 0.25…[12 Aug]
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