HSBC - Currency outlook - November 2013
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Transcript of HSBC - Currency outlook - November 2013
Macro
Currency Strategy
November 2013
Currency
OUTLOOK
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Guiding the EUR lower
Main contributors
David Bloom
Global Head of FX Research
HSBC Bank plc
+44 20 7991 5969
Paul Mackel
Head of Asian FX Research
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6565
Stacy Williams
Head of FX Quantitative Strategy
HSBC Bank plc
+44 20 7991 5967
Mark McDonald
FX Quantitative Strategist
HSBC Bank plc
+44 20 7991 5966
Robert Lynch
Head of G10 FX Strategy, Americas
HSBC Securities (USA) Inc.
+1 212 525 3159
Clyde Wardle
Emerging Markets FX Strategist
HSBC Securities (USA) Inc.
+1 212 525 3345
Marjorie Hernandez
FX Strategist, Latin America
HSBC Securities (USA) Inc.
+1 212 525 4109
Murat Toprak
FX Strategist, EMEA
HSBC Bank plc
+44 20 7991 5415
Dominic Bunning
FX Strategist, Asia
The Hongkong and Shanghai Banking Corporation Limited
+852 2822 1672
Daragh Maher
FX Strategist, G10
HSBC Bank plc
+44 20 7991 5968
Ju Wang
FX Strategist, Asia
The Hongkong and Shanghai Banking Corporation Limited
+852 2822 4340
The November decision to cut interest rates by the ECB may have been
influenced by lower than expected inflation, but we believe the strength
of the EUR was a key consideration. Our central forecast is for the EUR
to continue to weaken.
US data back in the spotlight
With the US debt-ceiling drama over for now, economic data releases
are back in focus. We examine how financial markets have traditionally
responded to data, which markets are most responsive and which
economic variables are now most important. Unemployment data and
survey data are being watched closely but can be hard to interpret as we
see in ‘Taking up the slack’ & ‘Reading UK surveys’.
NOK recovery finally in sight
Bright economic prospects for 2014 favour the NOK.
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Guiding the EUR lower (pg 3) The November decision to cut interest rates by the ECB may have been influenced by lower than
expected inflation, but we believe the strength of the EUR was a key consideration. A strong currency is a
problem for the Eurozone and the recent monetary easing is unlikely to be the last action to temper EUR
enthusiasm.
US data back in the spotlight (pg 8) With the US debt-ceiling drama over for now, economic data releases are back in focus. We examine how
financial markets have traditionally responded to data, and how the global financial crisis changed these
relationships. We also look at which markets are most responsive and which economic variables are now
most important.
Taking up the slack (pg 14) US unemployment rate announcements have never had a clean impact on markets. This continues to be
true despite the Fed now tying the outlook for interest rates directly to the unemployment numbers. The
difficulty in interpreting the headline rate lies at the heart of this.
Reading UK surveys (pg 15) Survey data make forecasting models better but they do not make them good. So while the surveys
suggest the UK is about to hit top gear, they may well be giving a false steer.
NOK recovery finally in sight (pg 16) Although the NOK has not performed well thus far in 2013, bright economic prospects for 2014 suggest
that NOK may again be becoming more attractive.
Dollar Bloc (pg 23) More CAD headwinds: We still expect USD-CAD to move higher, and for Fed tapering to play a role in
that move, but we expect more of that dynamic to play out in 2014, rather than into year-end.
Talking down the AUD: Despite concerns over the higher AUD, a further rate cut seems an unlikely
option. Low rates are already getting traction and even lower interest rates could risk overinflating the
housing market. Instead, the RBA will jawbone the AUD lower.
Summary
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Key events
Date Event
20 November FOMC publishes minutes of October meeting 20 November BoE publishes minutes of November meeting 25 November BoJ publishes minutes of October meeting 28 November BoE publishes Financial Stability Report 03 December RBA rate announcement 03 December BoE publishes record of Financial Policy Committee 04 December BoC rate announcement 04 December Fed releases Beige Book 04 December UK budget update and fiscal forecasts announced 05 December BoE rate announcement 05 December ECB rate announcement 05 December Norges Bank rate announcement 12 December RBNZ rate announcement 12 December SNB monetary policy assessment
Source: HSBC
Central Bank policy rate forecasts
Last Q1 2014(f) Q3 2014(f)
USD 0-0.25 0-0.25 0-0.25EUR 0.25 0.25 0.25JPY 0-0.10 0-0.10 0-0.10GBP 0.50 0.50 0.50
Source: HSBC forecasts for Fed funds, Refi rate, Overnight Call rate and Base rate
Consensus forecasts for key currencies vs USD
3 months 12 months
EUR 1.314 1.279JPY 101.0 104.5GBP 1.572 1.545CAD 1.093 1.103AUD 0.908 0.875NZD 0.805 0.782
Source: Consensus Economics Foreign Exchange Forecasts October 2013
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The Fed fixation Minutes from the September FOMC meeting
showed two considerations lay behind the
decision not to taper QE. One was the looming
fiscal debate which the Fed feared, justifiably in
the end, could damage growth prospects. The
other more prominent concern, however, was the
potentially damaging effect of rising US interest
rates on the recovery. To quote, “the tightening of
financial conditions observed in recent months, if
sustained, could slow the pace of improvement in
the economy and labour market.”
There are a number of elements which feed into
financial conditions, but in the case of the US, the
fixation is likely on long-term interest rates. The
US housing market is particularly sensitive to
shifts in long-term government bond yields as
many mortgages are taken out on a long term
fixed rate basis, and these mortgage rates closely
follow those of government yields (see chart 1).
Since May, when tapering talk began to get
traction in the market, mortgage rates have risen
alongside Treasury yields. This in turn has led to
softening in some US housing indicators, notably
in refinancing applications. Chart 2 again shows
the US mortgage rate but this time plotted against
mortgage refinancing. We have inverted the
refinancing series, but it shows that higher US
mortgage rates are associated with lower
refinancing demand.
Effectively, in delaying tapering, the Fed has
taken a judgement on what level of long-term
interest rates the US economy can bear. In this
environment, there is less of a focus on the
exchange rate. US policymakers are more fixated
on bond yields, not the USD. This can be thought
of in terms of a monetary conditions index. This
measure blends together movements in real short-
Guiding the EUR lower
1. US mortgage rates rose sharply during tapering talk
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US 10y r Treasury y ields US 30y r mortgage rates US 30y r Treasury y ields%%
Source: Bloomberg, HSBC
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term interest rates, real long-term interest rates
and the real effective exchange rate. However, the
picture painted can often be determined by the
weights given to each of the three components.
Much academic ink has been spilt trying to
optimise what the relative weights should be for a
given country
In chart 3, we show two MCIs for the US. The
black line shows the MCI when the interest rate
components are given the more dominant
weighting (4:1 vs FX), and the red line shows the
MCI when the exchange rate is instead given an
equal weighting. For the Fed, their perception of
monetary conditions is likely closer to the black
line than the red one.
Europe feels the pain
In Europe, the perspective on the relative
importance of the exchange rate and interest rates
is likely rather different. Much has been made of
the recovery in the Eurozone economy, and for
much of 2013, the numbers were generally been
better than expected. But there have been some
recent signs that the upside surprises are no longer
so prevalent (see chart 4).
2. US mortgage rates and mortgage refinancing activity
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Oct-12 Nov -12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May -13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov -13
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US MBA refiinancing (inv erted, SA Index ) US 30y r mortgage rate (%, RHS)
Source: Bloomberg, HSBC
3. MCIs vary according to the weights given to interest rates over the exchange rate
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Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
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US MCI (w eights: Rates 4:1 FX) US MCI (w eights: Rates 1: 1 FX)
Source: Bloomberg, HSBC
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It is hard to isolate the role of the stronger EUR in
these more recent disappointments but it is clear
that net exports have been an important part of the
recovery story. Chart 5 shows which parts of the
economy have been contributing the most to
Eurozone GDP growth YoY. The thick red line is
overall GDP growth: still mired in negative
territory, but things would have been a lot worse
were it not for the positive contribution from net
exports (shown in thick black line).
Much of this improved contribution from net
exports has been driven by lower imports
associated with weak domestic demand rather
than stronger exports (see chart 6). But a stronger
EUR is still an adverse factor as imports remain
more affordable than they otherwise would be,
and exports are constrained not just by lower
demand but by lower competitiveness also.
If we consider the Monetary Conditions Index
(MCI) faced by Europe, the picture is once again
determined to some extent by the weightings
chosen. We have chosen the 4:1 ratio between
rates and FX used for the US. It is likely that
policymakers in the Eurozone will be less
unnerved by the rise in long term interest rates
than their US counterparts, but more uneasy about
4. Eurozone economic surprise index has been turning lower
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Nov -11 Mar-12 Jul-12 Nov -12 Mar-13 Jul-13 Nov -13
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Source: Bloomberg, HSBC
5. Net exports has been the main positive contributor to Eurozone GDP
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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
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Consumption Gov ernment consumption
Total inv estment Stockbuilding
Net Ex ports GDP
Contribution to Eurozone GDP grow th, YoY%
Source: Bloomberg, HSBC
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the damage a stronger EUR may be doing to the
recovery. In either event, it shows that monetary
conditions have been steadily tightening for over a
year now. In current conditions, it would be tempting to argue
that the rise in the EUR is appropriate given the
Eurozone economy has shown signs of revival. But
the reality is that the pick-up in activity is modest.
It is unlikely to be sufficiently potent to drag down
lofty unemployment rates quickly, or deliver a
robust cyclical improvement in fiscal balances.
Nor is inflation an issue with CPI currently at a
lowly 0.7% YoY, in fact the threat of deflation is
growing. With such a fragile foundation, the
recovery can ill afford a stronger EUR.
6. Lower imports have been the key element of net export’s contribution
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Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13
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Net ex ports (EURbn, RHS) Ex ports YoY% Imports YoY%% EURbn
Source: Bloomberg, HSBC
7. Eurozone MCI has been consistently tightening for over a year now
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US MCI Eurozone MCI
Source: Bloomberg, HSBC
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The treatment
Fortunately, the ECB has potential medicine at
hand to try and reduce the pain being inflicted by
the stronger EUR. Interest rate reductions are
clearly a potent tool. For example, the November
decision to cut interest rates saw EUR-USD fall
swiftly from 1.35 to 1.33. Indeed, the EUR has
generally shown a rising correlation to medium
term interest rates expectations (see chart 8). We
believe that the EUR is firmly in the grouping of
currencies being driven by carry (see Currency
Outlook: ‘The new FX paradigm’, October 2013).
Successfully manoeuvring rate expectations lower
has seen the EUR fall in similar fashion.
President Draghi made it clear that a further rate
reduction is a possibility. He reminded markets
that the refinancing rate is not yet at the zero
bound and that the ECB is technically prepared
for a negative deposit rate. The interest rate threat
to EUR bears remains prominent. In addition,
another LTRO would also likely be EUR negative
given the market’s current perception of how QE
and currencies relate to each other. Actions speak
louder than words, and any LTRO or rate cut
would have a profound impact on market interest
rate expectations.
The timing of November’s decision to cut interest
rates by the ECB may have been influenced by
lower than expected inflation, but we believe the
strength of the EUR will have been a central
consideration even if the ECB does not want to
say so publicly. With further easing likely in the
Eurozone and a drift towards the exit from
monetary easing likely in the US, monetary policy
is unusually heading in opposite directions in the
Eurozone and US. It is a combination that we
believe will continue to drive EUR-USD lower,
and we retain our forecast of 1.30 by year end and
1.24 for end 2014.
8. Policy has the scope to manoeuvre the EUR lower
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Jan-13 Feb-13 Mar-13 Apr-13 May -13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13
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3M corr betw een EUR-USD and Dec 15 rate differential (EU-US)
Source: Bloomberg, HSBC
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Macro data announcements move markets It goes without saying that macro-economic data
are important for financial markets, but the
relationship between data and markets is complex.
Models that try to explain prices, such as
exchange rates, with macro variables directly tend
to perform poorly. For example, in their famous
paper of 1983 Meese and Rogoff1 looked at this in
detail for FX and found no explanatory power.
This seems somewhat at odds with the
observation that markets often move significantly
when new economic data is announced. This is, of
course, because in reality it is the news or
1 "Empirical Exchange Rate Models of the Seventies: Do they fit out of Sample?", Meese, R. and Rogoff, K., Journal of International Economics 14 (1983)
‘surprise’ component of a data release which is of
immediate importance. Expectations of future
data releases are constantly being priced in to
markets and it is the deviations from these
expectations which dominate on announcement.
These surprises have a strong and measurable
impact on markets and are very much a key
driver, though again the nature of the relationship
is not always simple.
In figure 1 we show the HSBC US Economic
Activity Surprise Index and 2-year US yields. The
surprise index is an aggregate of data surprises
across all significant US data releases. It is
published weekly (most recent available here) and
US data back in the spotlight
Economic releases and their impact on markets
1. US Surprise Index vs US 2-year yields
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US Activ ity Surprise 2-year y ields (RHS)
Source: Bloomberg, HSBC
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includes a full construction methodology. In short,
though, a positively trending index indicates that
data is generally coming in better than expected
and vice-versa for a declining index.
The index tracks the 2-year yield quite well up
until the end of last year. As tapering-talk started
to dominate, however, the relationship starts to
look rather less clear. Renewed emphasis on data
There is now a renewed emphasis on data. The
gradual normalisation of US monetary policy is
being anticipated and the US Federal Reserve has
taken the unusual step of linking its decisions
directly to economic variables, such as the
unemployment rate (see here).
Understanding the impact of data more fully is
thus crucially important. In this piece, we
examine how various asset classes have
traditionally responded to data, and how the crisis
changed this behaviour. We also look at the state
of play today – which markets are most
responsive and which economic variables are
most important. We can assess this directly by
looking at the correlation between economic data
surprises and market moves.
USD against major currencies
The average correlation between US activity data
surprises and the DXY index (a USD index
against major currencies) is shown in figure 2.
Up until 2007, the relationship was choppy but
essentially positive. Stronger data would typically
be positive for the USD, although the strength of
the relationship waxed and waned considerably.
The financial crisis completely changed this
relationship as the USD acquired safe haven
characteristics. Poor US data became good for the
USD resulting in a negative correlation on the
chart. The correlation is now back to pre-crisis
levels which is encouraging, although we were
briefly at similar levels in 2010.
Against the majors, the USD is certainly starting
to respond to data more normally – this
relationship does however need to be tracked
carefully, as it is prone to change rapidly.
2. Impact of data on USD-Majors
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USD becomes a "safe hav en"
normality returning..?
Source: Bloomberg, HSBC
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USD against EM currencies
The correlation between US data surprises and the
USTWI OITP (a trade-weighted USD index
against other important trading partners) is shown
in figure 3. The advent of the crisis produced a
significant change. Once again the correlation
dropped into negative territory as the USD
assumed safe-haven characteristics and EM
became classically ‘risk on’. As with the majors,
there are signs of some normalisation, with
correlations now back into positive territory – but
only just. The EM moves over the summer were a
stark reminder that, when it comes to the specific
issue of tapering, they can rapidly revert to type as
‘risky’ assets.
EM currencies are starting to behave a little more
normally with respect to US data – they are
however especially sensitive to US monetary
policy announcements. Interest rates
The impact of US data surprises on interest rates
depends significantly on the point on the curve in
question. Figure 4 shows the correlation between
US data surprises and the 2-year yield. Pre-crisis,
the 2-year yield was especially responsive to data,
3. Impact of data on USD-EM
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Source: Bloomberg, HSBC
4. Impact of data on 2-year yields
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Source: Bloomberg, HSBC
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with a strong positive correlation – much higher
than for currencies or equities. The impact on the
2-year yield is really the bellwether of data being
priced in ‘properly’ – the 2-year cleanly adjusted to
incoming economic news, as participants priced in
changing probabilities of rate moves. The advent of
the crisis did not destroy the relationship, as it did
with currencies, although it did severely weaken it.
During the height of the crisis the correlations
became very low, as crisis management and policy
response overwhelmed the relevance of official
data. Today the relationship is still rather weak
compared to pre-crisis times, which is noteworthy.
A return to pre-crisis correlations will be a strong
sign of genuine normalisation.
The responses of 5-year yields and 10-year yields
show a similar pattern, but in a more muted
fashion.
When it comes to data impact, the 2-year yield is
the one to watch for genuine normalisation. This
has not happened yet.
Equities
Pre-crisis, the relationship between data surprises
and equities was weak and variable. Equities were
never a clean play on economic data but this
changed substantially as the crisis developed.
The S&P became a ‘risk on’ asset, positively
responding to good economic news, and driven
more by global macro considerations rather than
the idiosyncrasies of its component stocks. Today,
normality seems to have resumed as far as the
response to economic data is concerned.
Equities have historically been relatively
unresponsive to economic data. This changed
considerably during the crisis, but has since
reverted.
5. Impact of data on S&P
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Source: Bloomberg, HSBC
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Which release now matters most?
Having seen how the main asset classes generally
respond to data, it is also illuminating to see how
the relative importance of particular economic
numbers has changed, and which releases are
most important now.
Non-farm payrolls has long been considered the
most important individual economic data release
and rightly so. Figure 6 shows the correlation
between payroll surprises and changes in the
5-year yield through time.
The impact of payrolls has been consistently strong
and continues to be strong today. This is in marked
contrast to the impact of the unemployment rate
shown in figure 7. One might have expected a
strong negative relationship through time but this is
not borne out by the data. In fact, during recent
times the relationship is the wrong way round.
This is especially pertinent given the stated
importance of the unemployment rate by the Fed.
It can only mean that the headline number alone is
actually of little immediate relevance to the
market. The problems of interpreting the release,
given a changing participation rate, are most
likely responsible. Payroll is easier to interpret
and still dominates.
The Chicago PMI release has had a huge fall in
importance as shown in figure 8. Pre-crisis this
survey number was of comparable importance to
payrolls but now it causes barely a ripple. The
other main regional survey from the Philadelphia
Fed does however remain relevant (figure 9).
6. Non-farm Payroll Impact 7. Unemployment Rate Impact
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Source: Bloomberg, HSBC Source: Bloomberg, HSBC
8. Chicago PMI Impact 9. Philadelphia Fed Impact
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Source: Bloomberg, HSBC Source: Bloomberg, HSBC
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What is most striking, though, is the emergence of
Housing Starts and New Home Sales as releases of
major significance (shown in figures 10 and 11). It
strongly suggests that the market is looking towards
new housing activity as a sign of genuine recovery.
Existing Home sales display far less impact.
Conclusion
The focus on economic data makes understanding
its impact on markets of renewed importance.
The ‘surprise’ component is of most immediate
consequence for asset prices, but the relationships
are not simple. The financial crisis changed how
data was absorbed into markets and it has, by no
means, fully normalised. Understanding the state
of play today is crucial, if one is to correctly
interpret forthcoming releases.
10. Housing Starts Impact 11. New Home Sales Impact
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Source: Bloomberg, HSBC Source: Bloomberg, HSBC
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This is an extract from the full report ‘Taking up
the slack’, 21 October.
As we discussed on page 12, US unemployment
rate announcements have never had a clean
impact on markets. This continues to be true
despite the Fed now tying the outlook for interest
rates directly to the unemployment numbers.
In fact, recently the relationship has been the
wrong way round. The difficulty in interpreting
the headline rate lies at the heart of this.
Choosing a target variable was never going to be
straightforward. The benefit of an unemployment
target is that the data is timely and not heavily
revised. But most importantly it is easily
understandable to the general public and therefore
particularly useful if you believe it is merely
animal spirits that are holding back the recovery.
But there are major issues with setting policy on
the back of the unemployment rate. Setting an
exact target runs into all sorts of problems if the
central bank has incorrectly measured the NAIRU
– the rate of unemployment which is consistent
with stable inflation. If they have set their
unemployment rate goal too low – they may get
more inflation than they bargained for (see ‘Low
participation nation’, 8 February, 2012). But there
are other problems. In particular, the pressure in the
labour market and therefore the potential for wage
inflation is not perfectly measured by the
unemployment rate. Indeed, given the length and
severity of the recent downturn, the unemployment
rate is doing a particularly bad job of summing up
the amount of slack currently present in either the
US or UK labour markets. That is because a
significant amount of the population is either
underemployed or temporarily discouraged from
actively seeking work. To accurately capture the
deflationary pressures in the economy at present,
central bankers should be considering a larger pool
of labour market information.
As a result, it seems likely that in the coming
months central banks will try to distance
themselves from tying the future path of policy to
headline measures of unemployment on a set
timescale, or to simply move the threshold. From
historical data, the current headline
unemployment rate suggests it will be some time
before the Fed meaningfully moves to the brake,
but accounting for other measures of slack one
can conclude we are even further away.
With the recent showdown in Washington
regarding the debt ceiling, markets are already
pushing back their expectations of when the Fed
will begin tapering. Even if a more concrete
resolution were to be reached in the coming
months, the labour markets of both the US and
UK suggest we shouldn’t fear a rapid withdrawal
of global liquidity any time soon.
Taking up the slack
Targeting the unemployment rate is a thankless task
Announcements have an inconsistent effect on markets
Karen Ward
Senior Global Economist HSBC Bank plc +44 20 7991 3692 [email protected]
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Macro Currency Strategy November 2013
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This is an extract from the full report ‘Reading
UK surveys: Top gear or false steer?’,
1 November.
Over recent months survey data across the board
has been very strong. Official data have also
improved, but have failed to keep pace with the
rampant surveys. Still, it would be wrong to
ignore the surveys and most economists use them
to inform their forecasts of the latest quarter’s
GDP growth.
We try to assess the incremental value of survey
data for forecasting the preliminary UK GDP
release. Initially, we focus only on services
activity because this accounts for about three
quarters of total UK output. We compare two
models: one model uses survey data and the other
doesn’t (naïve model). Our key findings are:
When trying to forecast the initial outturns of
services growth over our full data sample, a
simple model that includes the PMI clearly
out-performs a model that doesn’t.
But before the 2008/09 recession, the PMI
model only marginally outperformed the
naïve model.
So there is a danger that forecasters put too
much faith in the surveys once the economy
starts to normalise.
In general, average errors are large.
Forecasting GDP with surveys is a highly
uncertain business.
The PMIs help forecast initial growth
outturns but aren’t good at predicting revised
or ‘final’ data.
A similar exercise using the output component of
the manufacturing PMI and real-time data on
manufacturing output showed clear evidence that
the PMI is useful for forecasting throughout the
sample period, although the fit improves greatly
as the recession hits.
Services and manufacturing together make up 86%
of the UK economy. So combining model-based
forecasts of services and manufacturing output into
a rough nowcast for GDP growth suggest very
strong growth of 1.2% in Q4. But our own forecast
for Q4 growth, based on a wider set of indicators, is
currently just 0.5%. We should bear in mind that
the model-based forecasts are highly uncertain with
the model, unhelpfully, only able to predict Q4
growth of between 0.1% and 2.3% qoq confidently.
Survey data make forecasting models better but
they do not make them good.
Another reason to aim off the simple models is
that they forecast only the output side of the
economy. GDP by expenditure looks less
buoyant. Real pay is still being squeezed and
investment is picking up only slowly. However,
with the services PMI having risen again since in
October it is safe to say that there are big upside
risks to our Q4 growth forecast.
Reading UK Surveys
Surveys are helpful, but don’t put too much weight on them
Simon Wells
Chief UK Economist HSBC Bank plc +44 20 7991 6718 [email protected]
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Macro Currency Strategy November 2013
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Following an aggressive sell-off during the
financial crisis, the Norwegian Krone enjoyed
four consecutive years of increasing strength to
the end of 2012. Since the beginning of this year,
however, the trend has reversed and the NOK has
fallen by about 9% on a trade-weighted basis
(chart 1) and by 12% against the euro.
Why has the NOK traded so badly, and are there
any signs that this period of weakness is coming
to an end? NOK weakness this year seems to have
been caused by a combination of changed
perceptions of Norway’s cyclical outlook, reduced
fears over the future of the Eurozone, and ever
decreasing relative liquidity.
Weaker cyclical outlook
One of the reasons for continued NOK strength in
late 2012 was the belief that the Norges bank
would soon have to start raising rates again
because of the strength of the economy and the
growing risk of a housing bubble. Despite official
discomfort with the strength of the NOK at the
time, the market belief was that the authorities
would accept a strong currency rather than see the
domestic economy getting out of hand.
Chart 2 shows expected 3m interest rate spreads
between NOK and the EUR and USD out one
year. In early 2012 these spreads widened out
until the Norges bank cut rates in March (mostly
in response to currency strength), but stayed
around 160bp for the rest of the year as the market
believed that rates would soon have to be
increased again.
This year expected interest rate spreads narrowed,
especially in June, when the Norges bank
surprised the market by turning more dovish,
saying that policy rates would probably need to be
NOK recovery finally in sight
1. NOK has had a bad year so far
84
86
88
90
92
94
Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13
84
86
88
90
92
94
Import-weighted NOK
Wea
ker N
OK
Stro
nger
NO
K
Source: Bloomberg, HSBC
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Macro Currency Strategy November 2013
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kept lower for longer than had previously been
thought. This change in central bank view had a
significant impact on the currency (chart 1).
Since then, there have been further signs that
pressures on the Norges bank to move back to
more normal interest rates have eased further,
with consensus GDP forecasts being downgraded
(chart 3) and the rise in house prices moderating
further (chart 4).
Reduced fears of a Eurozone break-up
One of the factors behind the strength of the NOK
in 2009-2012 was the fear that the sovereign debt
crisis in the Eurozone would lead to the break-up
of the currency union. European investors wanting
to reduce exposure to the Eurozone saw NOK as
an attractive alternative. In 2013, however, fears
over the future of the Eurozone are much reduced
as can be seen by the narrowing of sovereign bond
spreads (chart 5). The incentive to accept lower
yields in Norway has been reduced.
The behaviour of NOK during 2013 suggests that
investors have been reducing their exposure to the
currency on a scale that it has proved difficult for
the market to absorb (chart 6).
2. Expected interest rate spreads narrowed this year
1.00
1.20
1.40
1.60
1.80
2.00
2.20
Dec-12 Mar-13 Jun-13 Sep-13
1.00
1.20
1.40
1.60
1.80
2.00
2.20
US-NOK 3M differential (4th contract) EUR-NOK 3M differential (4th contract)% %
Source: Bloomberg, HSBC
3. GDP growth forecasts have been downgraded
2.1
2.3
2.5
2.7
2.9
Nov -11 Mar-12 Jul-12 Nov -12 Mar-13 Jul-13
2.1
2.3
2.5
2.7
2.92013 Norw ay GDP consensus (% y -o-y )
Source: Bloomberg, HSBC
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The episodes of sharp weakness, though perhaps
triggered by news events, are suggestive that
relatively large transactions are going through the
market. This leads to the third main reason why
the NOK has traded so poorly this year –
declining relative market liquidity. Declining relative liquidity
Volumes in the FX market have continued to
grow rapidly in recent years. The BIS triennial
survey showed spot transactions in April 2013 at
more than USD 2tr per day, more than double
their level in 2007. The vast majority of this
turnover relates to financial market transactions
for investment and hedging purposes.
As the market has grown, the relative liquidity of
NOK has declined. Table 7 shows the currency
distribution of FX market turnover according to
the BIS survey. NOK has dropped from 10th in
2007 to 14th in 2013, as EM currencies such as
CNY, MXN and RUB have grown. According to
the BIS, daily turnover in EUR-NOK is about
USD 20bn per day, compared with USD 1,300bn
per day in EUR-USD.
4. The risk of a housing bubble seems reduced
Norw egian House Prices (% y -o-y )
-10%
-5%
0%
5%
10%
15%
20%
25%
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
-10%
-5%
0%
5%
10%
15%
20%
25%
Source: Statistic Norway, HSBC
5. Reduced fears over the Eurozone future have made NOK relatively less attractive
1
2
3
4
5
6
7
Jan-11 May -11 Sep-11 Jan-12 May -12 Sep-12 Jan-13 May -13 Sep-13
1
2
3
4
5
6
7Spain-Germany Italy -Germany
10 y r bond y ield spread% %
Source: Bloomberg, HSBC
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This declining relative liquidity is important given
the history of the currency since 2008. During the
crisis, there was an indiscriminate fall in all but the
perceived safe haven currencies, and this saw
EUR-NOK rise as high as 10 by end 2008. From
early 2009 to end 2012, the NOK gained ground
steadily as the attractions of Norway’s strong
economic fundamentals and fears over the future of
the Eurozone drew funds into the currency (chart 8). Positions gradually built over four years cannot
easily be cut in an illiquid market without having a
significant impact on price. Changed expectations
about Norges bank policy and reduced fears of a
Eurozone break-up may well have induced investors
to reduce exposure to the NOK, and the sharp fall in
June may have induced further liquidation in
August and September. The fall in SEK after very
weak inflation numbers in November seems to have
been behind the latest fall. Hence, despite what still
appear to be very attractive fundamentals, we are
left with a currency that is languishing at
surprisingly weak levels.
7. NOK no longer a top 10 currency by trading volume
2001 2004 2007 2010 2013 Currency Share Rank Share Rank Share Rank Share Rank Share Rank
USD 89.9 1 88.0 1 85.6 1 84.9 1 87.0 1 EUR 37.9 2 37.4 2 37.0 2 39.1 2 33.4 2 JPY 23.5 3 20.8 3 17.2 3 19.0 3 23.0 3 GBP 13.0 4 16.5 4 14.9 4 12.9 4 11.8 4 AUD 4.3 7 6.0 6 6.6 6 7.6 5 8.6 5 CHF 6.0 5 6.0 5 6.8 5 6.3 6 5.2 6 CAD 4.5 6 4.2 7 4.3 7 5.3 7 4.6 7 MXN 0.8 14 1.1 12 1.3 12 1.3 14 2.5 8 CNY 0.0 35 0.1 29 0.5 20 0.9 17 2.2 9 NZD 0.6 16 1.1 13 1.9 11 1.6 10 2.0 10 SEK 2.5 8 2.2 8 2.7 9 2.2 9 1.8 11 RUB 0.3 19 0.6 17 0.7 18 0.9 16 1.6 12 HKD 2.2 9 1.8 9 2.7 8 2.4 8 1.4 13 NOK 1.5 10 1.4 10 2.1 10 1.3 13 1.4 14 SGD 1.1 12 0.9 14 1.2 13 1.4 12 1.4 15
Source: BIS, HSBC
6. Price movements in recent months are indicative of position liquidation
EUR-NOK
7.2
7.4
7.6
7.8
8.0
8.2
8.4
Jan-13 Feb-13 Mar-13 Apr-13 May -13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov -13
7.2
7.4
7.6
7.8
8.0
8.2
8.4
Source: Bloomberg, HSBC
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Macro Currency Strategy November 2013
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Is it over?
The analysis suggests that the NOK has been
driven this year by liquidation of investment
positions built up over several years in a relatively
illiquid market. It is obviously very difficult to
identify when this process may be over, but there
are reasons to suggest that the NOK may enjoy a
better performance going forward. Relative cyclical position improving
Weaker growth expectations in Norway are
increasingly being matched by lowered expectations
elsewhere, with growth expectations for the US and
much of the EM world being cut. Despite lowered
expectations for growth this year, the prospects for
the Norwegian economy are still good. Real wage
growth is strong and unemployment is low, so
consumer spending should be well supported next
year (charts 9 and 10).
8. A protracted period of NOK strength may have encouraged position building
EUR-NOK
7.0
7.5
8.0
8.5
9.0
9.5
10.0
Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13
7.0
7.5
8.0
8.5
9.0
9.5
10.0
Source: Bloomberg, HSBC
9. Real wage growth is strong… 10. …and unemployment low
-2.0
-1.00.0
1.02.0
3.0
4.05.0
6.0
Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12
-2.0
-1.00.0
1.02.0
3.0
4.05.0
6.0
Real w age % change y -o-y% %
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Unemploy ment rate% %
Source: Bloomberg, HSBC Source: Bloomberg, HSBC
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Macro Currency Strategy November 2013
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We expect Norwegian GDP growth to be the
strongest in the G10 next year (chart 11), so the
relative attractiveness on the NOK would seem to
be growing again.
The fall this year has now made NOK ‘cheap’
The fall in the NOK this year has pushed its real
effective exchange rate back down to levels last
seen in 2009 and to about 3% below its 5 year
moving average (chart 12). While this is not an
absolute measure of value, the currency has traded
in a range about 5% above and below this moving
average since mid 2009 and it is now towards the
low end of its range.
Furthermore, within the G10 only the yen is
further below its 5 year REER average, and this
reflects a policy-induced currency fall from very
elevated levels (chart 13). Relative to the other
G10 currencies, NOK would appear to offer good
value at current levels.
11. Norwegian GDP growth expected to be the strongest in the G10 next year
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
Nor
way
*
New
zeal
and
Aust
ralia US
UK
Can
ada
Ger
man
y
Japa
n
Euro
zone
Fran
ce
Italy
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%GDP grow th forecasts for 2014
Source: HSBC * Mainland
12. NOK at the low end of its 4 year range on a REER basis
90
95
100
105
110
115
120
125
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
90
95
100
105
110
115
120
125NOK Trade-Weighted REER 5 Yr MA IndexIndex
1 Jan 1996 = 100
Source: Bloomberg, HSBC
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The fundamentals remain as strong as ever
Finally, the economic fundamental for Norway
remain as compelling as ever. Solid GDP growth
and low inflation are combined with large fiscal
and current account surpluses all of which means
that Norway is in a stronger economic position
than its G10 peers (chart 14). Of course, these
fundamentals did not stop the NOK falling this
year, but combined with the other factors outlined
above, the case for a NOK recovery is now
stronger than ever.
Conclusion
The NOK has not performed well thus far in 2013
as lowered interest expectations and reduced fears
on the future of the Eurozone seem to have
triggered investment position reduction in an
illiquid market. While it is impossible to be
completely confident that this process is over,
bright economic prospects for 2014 suggest that
NOK may again be becoming more attractive. At
the same time, the falls this year mean that those
looking to buy NOK are doing so at levels that
appear to offer good value.
14. Norway retains its enviable budget and current account surpluses
New Zealand
CanadaAustraliaUS
UK
Japan
EurozoneSw eden
Sw itzerland
Norw ay
-15%
-10%
-5%
0%
5%
10%
15%
-6% -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 16%
Current account (% GDP), 2013f
Budg
et (%
GD
P), 2
013f
Current account v s Fiscal balance for G10 countries, 2013f
Source: HSBC
13. Only JPY is further below its 5 yr average on a REER basis
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
NZD SEK GBP CHF AUD EUR CAD USD NOK JPY
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%% gap betw een current trade w eighted REER and 5y r MA
Source: Bloomberg, HSBC
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Macro Currency Strategy November 2013
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More CAD headwinds The Bank of Canada’s decision to drop its
tightening bias in October has been followed by
some slippage in the CAD, while better US data
and yet another shift in Fed tapering expectations
have also supported USD-CAD.
BoC to neutral
Although the Bank of Canada left the overnight
target rate unchanged at 1.0% at its October 23
policy announcement, as widely expected, it
caught the market off guard by adopting a neutral
policy stance, removing the tightening bias that
had been in place for the past three years. In
making the change, the BoC noted, “the fact that
inflation has been persistently below target means
that downside risks to inflation assume increasing
importance”. The Bank remains concerned about
household imbalances (elevated levels of credit)
and as such shows no inclination to shift to a
dovish bias. Nonetheless the low inflation
backdrop has clearly taken on greater significance
as it has elsewhere, including the long standing
concerns and policy responses in Japan, the more
recent justification for the latest rate cut from the
European Central Bank, and the voiced concern
about lower US inflation by some Fed officials.
The Bank of Canada targets inflation in the
middle of a 1% to 3% band. For the past year,
headline CPI has held near and below 1%, the
bottom of the target band. In addition, core CPI,
one of the commonly used predictors of future
headline inflation, has ranged from 1.0% to 1.4%
in the past year (chart 1). Beyond that, our Canada
economist noted that in the BoC’s Autumn 2013
Business Outlook Survey, low inflation
expectations were becoming more firmly
entrenched, highlighted by the fact that 70% of
firms expected inflation of between 1% and 2%
over the next two years. Inflation below the 2%
target, as well as indicators and expectations that
it will persist well into the future, prompted the
shift in emphasis from the BoC.
Dollar Bloc
1. Inflation remains at the lower end of the BoC’s target range
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Jan-10 May -10 Sep-10 Jan-11 May -11 Sep-11 Jan-12 May -12 Sep-12 Jan-13 May -13 Sep-13
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0Canadian CPI, % YoY Canadian Core CPI (BoC), % YoY
Source: Bloomberg, HSBC
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CAD reacts to the shift in BoC policy expectations
We have regularly highlighted the BoC’s
tightening bias in our views and outlook for the
CAD in recent years. It is also the case that the
BoC has steadily diluted that tightening bias in a
manner whereby markets expected no imminent
rate hike. Indeed, BoC policy expectations as
measured by 1-year Canada OIS rates (where
markets expect the overnight rate to be in a year’s
time) have been relative steady for quite some
time, leaving little opportunity to impact the
CAD. That said, markets are now looking even
further into the future, due in part to forward
guidance by many major central banks that policy
interest rates will not start to increase until well
into the future, perhaps not for two or three years.
As a result, we looked at 2-year Canada OIS and
found that the rate has dropped more noticeably in
the last two months, from above 1.35% in
September down to 1.10% in the week after the
BoC dropped the tightening bias in October,
suggesting the market began pricing out 2015
tightening as well. And that shift lower in yields
did indeed coincide with some slippage in the
CAD (chart 2).
CAD strength not welcome
Two other notes on the Bank of Canada in regards
to the CAD. First, the BoC again referenced the
delay in the expected rotation of demand in
Canada towards exports and investment as it did
in its September statement. However, the
continued delay was a factor causing the Bank to
lower its growth forecasts in October. While the
BoC did not specify the currency’s role in that
regard, the sought after shift towards increased
exports would be impeded by a stronger CAD.
Second, CAD fluctuations also play a role in
inflation. Given the newfound focus on
undershooting the inflation target, that too
represents a condition that would be exacerbated
by CAD strength.
Canada data is mixed
On the data front, Canada’s October jobs report
was mixed. Employment rose 13.2K in October,
near expected, and the 16K rise in full time jobs
added an element of strength to the headline.
However, private sector employment fell 22.1K
on the month, with government employment
jumping 47.3K, a clearly less favourable mix.
Hourly wages increased 1.7% y/y, down from the
1.8% pace in September and suggesting
less-strong consumption (without dipping into
2. BoC rate hikes pushed back
1.0
1.1
1.2
1.3
1.4
01-Aug-13 16-Aug-13 31-Aug-13 15-Sep-13 30-Sep-13 15-Oct-13 30-Oct-13
1.02
1.03
1.04
1.05
1.06
2-y ear Canada OIS, % USD-CAD (inv erted, RHS)
Source: Bloomberg, HSBC
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Macro Currency Strategy November 2013
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savings or using credit, which would also be less
favourable). It is also a factor contributing to low
levels of inflation. The unemployment rate was
steady at its cycle low of 6.9%, but the labour
participation rate also held at its cycle low of
66.4%. On balance, the modest pace of job
creation, low wage growth and low participation
suggest a softer pattern of consumption and
overall growth going forward. Looking ahead,
potentially key data include readings on October
CPI and retail sales, and the Q3 reports on the
current account and GDP.
Better US jobs data puts Fed tapering back on the radar, aiding the USD
The USD itself has received an additional lift
following the strong October employment data in
the US. Although many market participants had
previously assessed that Fed tapering was unlikely
to begin until Q1 2014, the report raised at least
some risk of a December tapering. US yields have
risen notably following the data and the USD has
gained broadly as well, including against the
CAD. If tapering expectations continue to build,
and are followed by actual tapering at the
December 17-18 FOMC meeting, the USD should
continue to benefit, and we would expect USD-
CAD to make new highs for the year (the existing
high was 1.0609 reached in July). However, given
the September “no tapering” experience, we have
less conviction that the Fed will act in December.
Moreover, that same experience will leave the
market more cautious as well. We recognize that
the market’s Fed policy expectations will continue
to evolve, and that this latest shift has indeed
aided the USD. But lacking clearer guidance from
key Fed officials and additional, supporting
economic data, we suspect further USD-CAD
gains based on Fed tapering expectations will get
more difficult in the coming month. We continue
to look for USD-CAD to move higher, and for
Fed tapering to play a role in that move, but we
expect more of that dynamic to play out in 2014,
rather than into the end of this year.
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Talking down the AUD
AUD rose to 4-month high of 0.9750 on 22
October despite a lack of supporting economic
data. At its last meeting (5 November) the RBA
expressed concern over the elevated currency and
noted that cutting rates further is an option.
However, we think this option is unlikely. Cutting
interest rates further seems somewhat unpalatable,
because low rates are already getting traction and
even lower interest rates could risk overinflating
the housing market. Instead, the RBA will attempt
to jawbone the AUD lower.
Recent economic activity and housing market data
showed more signs that lower interest rates have
been supporting the economy. Retail sales
surprised to the upside rising 0.8% (against
expected 0.4%) in September. Low interest rates
are supporting rising asset prices which, in turn,
now appears to be flowing through to a bit more
retail spending. Moreover, house prices have been
rising (chart 1) with Q3 data showing a 1.9%
increase from a previous quarter and we expect
the trend to continue (see ‘Downunder digest:
Australia’s housing boom: no bubble yet’,
8 October). Inflation has also been on the upward
trend since the second half of the year (chart 2).
Headline CPI rose 1.2% in Q3 (vs expected 0.8%)
pointing out that while inflation remains
comfortably in the RBA target band, it is picking
up at a pace that is faster than expected. Summing
up the above, any further rate cut could accelerate
house prices and inflation from their already
modest levels and thus mute the effects of weaker
AUD on the economy.
What options does the RBA then have to weaken
the currency? The RBA knows that the level of
the AUD is mostly determined by international
investors and other major central banks’ actions.
At the same time, they would like to see growth
rebalance more, which leaves them hoping the
AUD will do some more work for them. The
AUD is a classic risk currency that still needs US
flows and therefore earlier tapering could put
some downward pressure on the AUD and help
facilitate further rebalancing. However, with the
disruptions from the US fiscal debacle, tapering is
now viewed to be delayed until 2014. Therefore,
at this stage the most likely policy tool to be
applied is jawboning the currency lower. The
Governor, Glenn Stevens, in his speech on
29 October suggested the AUD was still too high.
Further, following the November rate
announcement, RBA’s Assistant Governor
Debelle gave commentary at the IMF in
Washington suggesting that ‘in Australia’s case,
an exchange rate appreciation that is not in line
with the fundamentals, if persistent enough, can
lead to Dutch Disease’.
1. Lower rates have been driving house prices up 2. Inflation has picked up since beginning of 2013
5.0
6.0
7.0
8.0
9.0
Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13
-4.0
-2.0
0.0
2.0
4.0
6.0
Mortgage rate, % per annum (inv erted, RHS)House price, % QoQ
-0.2
0.0
0.20.4
0.60.8
1.01.2
1.4
Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13
-0.2
0.0
0.20.4
0.60.8
1.01.2
1.4CPI, % QoQ
Source: Bloomberg, HSBC Source: Bloomberg, HSBC
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Macro Currency Strategy November 2013
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In all, we believe the RBA’s strategy of talking
the currency down will prove to be effective for
now. With labour market still weak and the
Central Bank projecting it to remain on the back
foot throughout 2014 the economy is still looking
fragile. This as well as generally choppy global
economic outlook and soft commodity prices,
should also keep pointing towards weaker AUD.
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G10 at a glanceCHF Switzerland: Deflation threat will not lead to changes
1.01.11.21.31.4
1.51.61.7
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
0.6
0.8
1.0
1.2
1.4
1.6
1.8
EUR- CHF (LHS) USD- CHF (RHS)
Until recently the risk of deflation seemed to have diminished, with data coming out at around zero the last four months. However, in October year-on-year CPI showed a drop of 0.3%. As there is little in the way of policy to counter the threat of renewed deflation, this appears to be worrying. Further, disappointing inflation data when taken together with the surprising ECB cut, left many asking if the Swiss would adjust the EUR-CHF floor?
In our view the answer is simple: No. The floor has survived some hairy moments, particularly in 2012 when the Swiss had to buy massive amounts of EUR into their reserves. Since then, the EUR-CHF has settled in the 1.20 - 1.25 range and the SNB must be very happy with this level of stability. Therefore, we think, the Central Bank has no incentive to put themselves back into a precarious position and will have to live with the renewed deflation threat.
Source: Bloomberg
EUR-NOK Norway: XXX
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
See ‘NOK recovery finally in sight’, page 16
Source: Bloomberg
EUR-SEK Sweden: Rate cuts back on the agenda
8.08.48.89.29.6
10.010.410.811.211.612.0
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
8.08.48.89.29.610.010.410.811.211.612.0
The feeling that many got after the last Riksbank minutes (6 November) was that rates could stay low for longer even if the economy was to show signs of improvement. The PMI for manufacturing has been moving higher and so has the service sector PMI and hence these comments put the market’s mind at rest. Two days later the economic bombshell came.
Industrial production for September was unchanged whilst the market had expected a solid bounce back following a big drop the month before. Meanwhile, industrial orders fell 2.9% following a drop in the previous month.
In short, if the Riksbank is prepared to keep rates low into an improving economic environment surely they are inclined to cut rates into renewed economic weakness. Hence rate cuts are back on the agenda. This should put downward pressure on the SEK particularly against the NOK which we think is ripe for a rally.
Source: Bloomberg
29
Macro Currency Strategy November 2013
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The October FOMC meeting, which saw Fed
officials displaying less concern over the
‘tightening of financial conditions’, saw Asian
currencies soften. We suspect that some Asian
central banks had used earlier periods of lower FX
volatility to rebuild FX reserves. In most places,
FX reserves increased through September and
October, which suggests Asian policy makers are
better prepared for the eventual tightening of USD
liquidity and its impact on regional currencies.
But going into 2014, we believe most of Asian
currencies are likely to remain under downward
pressure, especially versus the USD. Regional
growth has stabilized, but not accelerated. In most
places, policymakers still need to proceed with
challenging structural reforms. As such we still
think this is a ‘pick and choose’ market where
those Asian currencies with weaker fundamentals
and external balances will underperform (i.e. INR
and IDR).
The INR had benefited from some positive
sentiment stemming from proactive decisions by
the RBI to normalize interest rates and focus on
inflation. The expected expiry of the temporary
swap windows for onshore oil companies as well
as FCNR accounts by the end of November will
be a critical test to the currency’s recent stability.
As for the IDR, recent rate hikes and an
improvement in onshore FX liquidity should point
to some more optimism for the currency. But
more time is needed to ascertain if we are seeing
the beginning of a sustainable development. The
IDR is not out of the woods in our view.
The MYR initially traded positively on the
unveiling of the 2014 budget on 25 October (See
‘Malaysia’s budget: A cautious, balanced
strategy’, 25 Oct 2013). But we maintain our
caution towards this currency, believing it will
remain relatively volatile for some time.
For those currencies with better fundamentals,
FX policy is now coming to the fore. The PHP
remains supported by healthy external balances
and remittance inflows typically show a seasonal
pick-up in Q4. However we see small likelihood
of an outperformance given rising FX intervention
and richer valuation. (See ‘PHP: A currency for
all seasons?’, 31 October 2013).
Similarly in Korea, rising policy resistance has
supported USD-KRW despite strong trade
numbers and portfolio inflows. The SGD stands
out in this respect following the MAS decision on
14 October to maintain the appreciation path of
the SGD NEER. The MAS stance suggests policy
tolerance for further appreciation of the SGD,
which is currently trading above the mid-point but
further away from the ceiling of our revised SGD
NEER band. (See ‘SGD: Battle of the Band’,
6 November 2013)
The RMB has been the best-performing Asian
currency since the October FOMC meeting. Prudent
monetary policy by the PBoC has kept interbank
liquidity relatively tight. Economic data continued to
show stabilization in the domestic economy.
Moreover the PBoC has continued nudging the
onshore CNY fix lower despite renewed USD
strength. This has fuelled expectation of a band-
widening move and further FX reforms. We expect
policy makers to continue to push forward with
RMB internationalization and capital account
liberalization measures.
Asia – regional overview
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USD-CNY China (CNY): Reforms on the cards
6.06.26.46.66.87.07.27.47.67.88.08.28.4
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
6.06.26.46.66.87.07.27.47.67.88.08.28.4
We expect more detailed measures on FX liberalisation and capital convertibility to emerge now that the third Plenum has been completed. The PBoC’s recent daily FX operations – via both intervention and movements in the USD-CNY fix – suggest that FX liberalisation, including a potential widening of USD-CNY’s daily trading band, could be around the corner.
The new Shanghai Free Trade Zone should start to take off when more detailed rules are announced after the plenum. We expect the zone to be a test ground for RMB convertibility, enhancing offshore RMB liquidity over time.
China’s FX reserves increased by USD166bn in Q3, the biggest quarterly gains since Q1 2011. FX inflows have rebounded strongly after posting a small net outflow in late 2Q. Strong inflows pressures are supporting the CNY but this is challenge for the authorities when trying to introduce more market driven FX reforms.
Source: Bloomberg
USD-HKD Hong Kong (HKD): The peg is here to stay
7.70
7.72
7.74
7.76
7.78
7.80
7.82
7.84
97 99 01 03 05 07 09 11 13
7.70
7.72
7.74
7.76
7.78
7.80
7.82
7.84 The HKD’s Linked Exchange Rate System (LERS) had its 30th
anniversary in October. We do not believe the system is under pressure to change. Despite the importing of low interest rates, Hong Kong’s inflation remains inline with its long-term average.
In other words headline inflationary pressures are not rising because of a low interest rate setting. In addition, the authorities have enough tools via macro-prudential measures and fiscal policy to curb excessive asset price inflation. And it is unclear whether an alternative system to the LERS would work better.
Despite Fed tapering concerns and Hong Kong’s weakening current account position, the HKD has remained stable and credibility of the LERS remains intact. We think the HKD peg is here to stay for the foreseeable future.
Source: Bloomberg
USD-PHP Philippines: A currency for all seasons?
25
30
35
40
45
50
55
60
97 99 01 03 05 07 09 11 13
25
30
35
40
45
50
55
60
We had favoured the PHP compared to its ASEAN peers but we note that the positive impact of stronger Q4 remittance flows on the currency has been declining in recent years. This is due to the growing importance of capital flows for the PHP, and is also a reflection of FX policy curtailing seasonal PHP strength.
We also believe that much of the good news is “in the price” for the Philippines. Onshore bond yields remain lower than in the likes of Malaysia and Thailand (despite their stronger credit ratings), with little possibility of another ratings upgrade in the near future, in our view. Meanwhile, the PHP appears to be one of Asia’s most overvalued currencies on a REER basis.
The PHP should still hold up better than many of its peers, especially if broad USD strength re-emerges. Stable foreign inflows will remain supportive, while the country’s strong fundamentals should encourage investors to remain invested onshore, even if external factors start to turn negative.
Source: Bloomberg
Asia at a glance
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Asia at a glance continued USD-KRW South Korea: FX policy becoming more of a barrier
800
1000
1200
1400
1600
1800
2000
97 99 01 03 05 07 09 11 13
800
1000
1200
1400
1600
1800
2000
The KRW continues to be one of the region’s most consistent outperformers thanks to its strong fundamentals. The current account surplus is pushing higher on the back of resilient exports. The financial account, particularly in terms of portfolio investment, has also registered sizable inflows.
But policy makers are showing increasing resistance towards further strengthening of the KRW. Several officials from the Finance Ministry have made comments warning against ‘excessive currency strength’ amidst heightened external uncertainty. Their moves have capped the strength of the KRW versus the USD.
Going into next year, the solid balance of payments position will continue to support our view that the KRW will be one of Asia’s most resilient currencies. Given its strong fundamentals, authorities may face an uphill battle in trying to stem the currency’s strength.
Source: Bloomberg
USD-SGD Singapore: Battle of the band
1.10
1.20
1.30
1.40
1.50
1.60
1.70
1.80
1.90
97 99 01 03 05 07 09 11 13
1.10
1.20
1.30
1.40
1.50
1.60
1.70
1.80
1.90
At its biannual meeting in October, the MAS maintained a path of modest and gradual appreciation for the SGD NEER. Since then, the SGD stands out as one of the few currencies where external flows appear to support appreciation and where FX policy is not providing a stiff barrier to ongoing currency gains.
We have slightly shifted the mid-point of estimated SGD NEER policy band in our model. Despite this, we still see the SGD NEER in the top half of the policy band, and thus only limited room for independent SGD appreciation. However, into 2014 the SGD is likely to be an outperformer.
The MAS’s ongoing hawkish bias and the underlying trend for SGD NEER appreciation should remain intact at least until the next MAS policy meeting. If so, the SGD could actually outperform versus currencies where FX policy is more focused on curbing currency appreciation or building up FX reserves, or where external balances are much less supportive.
Source: Bloomberg
USD-MYR Malaysia: Remain cautious despite budget
2.4
2.8
3.2
3.6
4.0
4.4
4.8
97 99 01 03 05 07 09 11 13
2.4
2.8
3.2
3.6
4.0
4.4
4.8
Liquid markets, relatively higher yields and benign FX policy have seen the MYR trading in a higher beta manner than most other currencies in the region. While this has helped the currency, we think it also makes the MYR vulnerable when USD liquidity inevitably tightens.
The FY2014 budget, presented on 25 October, has helped stave off some near-term concerns about Malaysia’s fiscal dynamics. The MYR initially reacted positively on the news that the government will introduce the much-anticipated Goods and Services Tax (GST). But beyond the knee-jerk reaction, the degree of implementation will remain a key test.
In the medium-term, the decline in the MYR’s external balances, as well as sizable presence of foreign investors in the onshore markets, leaves the currency more vulnerable than others. Although it is unlikely to fall into deficit currency category, we think the central bank should use pockets of MYR strength to bolster its FX reserves buffer further.
Source: Bloomberg
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Fed tapering, Mark 2
External drivers, in particular the renewed rise in
US yields, have taken precedence again pushing
USD-LatAm FX higher again. Our previous call
that a window of opportunity for tactical trades
had been opened has come under challenge as
regional currencies have broken out of their recent
ranges in the last few days. Still, we continue to
believe that differentiation does matter and see
pockets of value in currencies with better
fundamentals like the MXN as well as those
supported by official intervention like the PEN
and BRL.
Last month we discussed our more constructive
view on LatAm currencies as being a short term
tactical view. The key risk we highlighted for any
(selective) long LatAm positioning was a possible
rise in US yields on expectations of Fed tapering.
Indeed, following the stronger October US payroll
data we have seen this risk play out.
US 10-year yields have risen from 2.48% to
2.78%, with the last 18bps of this move coming
post-payrolls. With this rise in US yields we have
witnessed a stronger dollar, not just against
LatAm, but most EM currencies. Once again,
investors have grown cautious on EM FX as an
asset class, particularly among the ‘deficit’
countries. Within the LatAm space, the BRL
(8%), CLP (5%), COP (3%) and MXN (3%) have
been hardest hit vs the USD.
Broadly, we are cautious on LatAm FX given the
uncertain global environment, particularly
regarding the path of US rates. However, we still
see pockets of value. Notably we like buying the
PEN around the 2.80/USD level given the central
bank’s defence of the PEN at that level. The
MXN also looks relatively cheap, and while we
would look to sell USDs above 13.30, we would
caution that the MXN has shown the tightest
correlation to US yields. Therefore, should US
10-year rates keep ticking higher, we would
expect USD-MXN to do the same, but neither is
our house view.
BRL also looks somewhat oversold around the
2.35 level and we believe that the rate of
depreciation should moderate on account of:
1) improved valuations, 2) higher interest rate
differentials, 3) expectations of an extension of the
intervention program, and 4) a more favourable
technical position. In the near-term, the BCB
remains committed in supporting the BRL via daily
dollar sales and recently announced it would begin
to roll its USD10bn worth of 1 December maturing
swaps, starting 12 November – an indication that it
intends to roll the full amount to prevent further
downside pressures on the BRL.
In contrast, Colombian authorities are still buying
USDs, and will likely be pleased with the recent
COP weakness, taking USD-COP back into their
previously-stated desired target range of 1900-
1950. This intervention is expected to be
continued through year-end, but is unlikely to be
renewed when it expires at end-2013 due to rising
fiscal costs and improved COP levels.
Latam– regional overview
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USD-BRL Brazil: Breaking out of the range
1.00
1.50
2.00
2.50
3.00
3.50
4.00
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
1.00
1.50
2.00
2.50
3.00
3.50
4.00
We had been arguing for range-bound BRL trading following the implementation of the BCB’s automated intervention program and apparent stability in US Treasuries. A spike in US Treasury yields following the better than expected October US payrolls pushed USD-BRL out of the recent 2.15-2.25 range.
On the domestic front, the acceleration of the fiscal deterioration - and the associated risks of a future ratings downgrade – is also weighing increasingly ont the BRL. As BRL moved back towards 2.35/USD, the BCB signalled earlier than usual that it would start rolling over the USD10bn in swaps maturing 1 Dec. In our view, this reflects their willingness to keep USD demand for hedging well supplied.
The external backdrop remains the main risk for the BRL, but we continue to believe that the rate of depreciation should moderate on account of: 1) improved valuations, 2) higher interest rate differentials, 3) expectations of extension of the intervention program, 4) more favourable technical position.
Source: Bloomberg
USD-MXN Mexico: Weaker USTs weigh on MXN
8.5
9.5
10.5
11.5
12.5
13.5
14.5
15.5
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08Ja
n-09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
8.5
9.5
10.5
11.5
12.5
13.5
14.5
15.5
A confluence of factors have led to a weakening of the MXN, including softer domestic growth, concerns over a wider fiscal deficit and a stronger USD across all EM – in line with rising US yields. However, we believe there is room for the MXN to stage a recovery, based on three assumptions.
First, that UST yields will not rise significantly further. Second, growth in Mexico will rebound (our economists expect to 4.1% in 2014) and that stronger US activity will ultimately be deemed to be a positive factor for Mexican assets. Lastly, we see room for some upside surprise from the energy reforms slated to be passed by year end. To date, the government has indicated that they will favour profit-sharing contracts for foreign oil companies, but media reports (e.g. Bloomberg, 11/11) have suggested the government may consider more attractive production-sharing contracts or even concessions.
This could see accelerated foreign investment, and more room for the MXN to recover from current levels.
Source: Bloomberg
USD-CLP Chile: Political risks rise
400
450
500
550
600
650
700
750
800
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
400
450
500
550
600
650
700
750
800 The CLP has failed to avoid the recent EM sell-off, falling over
5% since mid-October. As well as the external factors already discussed in this section, political risks are also at play.
Michele Bachelet is widely expected to win the presidential election (to be held a few days after this publication goes to print), and has campaigned on a platform that includes significant increases in corporate taxes. Whatever the final tax reform, until we see more clarity investors are liable to remain cautious. Bachelet has also suggested her administration may make changes to the treatment of foreign investment (presently treated equal to local investment), which represents another potential worry to the market.
A further rate cut is also expected this month while copper prices have softened. CLP weakness may be overdone, however, and more clarity on the political front could allow a relief rally to take place. We still target 500/USD year end.
Source: Bloomberg
Latin America at a glance
34
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Looking for value in a hectic market
CEE-4 FX is relatively ‘safe’
The price action is very hectic since the Fed
decided to not taper in September. With such a
backdrop, the aim is to identify where the value is
and which are the defensive currencies.
We consider that CEE-4 currencies are the most
defensive in the EMEA space. They are less
vulnerable to a reduction of capital inflows to EM
as the structure of the balance of payments has
improved markedly over the past two years. CEE
current account deficits are now small and entirely
covered by EU structural funds. It is also worth
emphasising that foreign direct investments, the
most healthy flow, are smaller than prior to the
financial crisis but still large enough to entirely
cover the C/A deficits in most of the countries.
Moreover, FX reserves and solvency ratios are at
comfortable levels, providing extra buffer
CEE currencies are also relatively safe because
they do not show signs of valuation misalignment.
If the RON appreciation appears to be slightly
overdone, the PLN is fairly-valued while the CZK
and above all the HUF are cheap.
Don’t blindly avoid more vulnerable currencies
If CEE currencies offer the best value to
‘defensive’ characteristics, we are not necessarily
seeing more vulnerable currencies with large
external imbalances weakening much further.
If the recent set of economic data, persistent social
unrest and Fed tapering fear may keep the ZAR
under pressure in the near-term, we do not see a
major upward movement of USD-ZAR as the FX
adjustment has already largely occurred. In fact, we
retain a mild constructive view in the medium-term
as we believe that the past ZAR depreciation will
eventually lead to a reduction of the external deficit.
The case of TRY is interesting and specific. The
macro rebalancing in Turkey cannot be achieved
via a further currency appreciation given its
collateral damages on inflation. The interest
channel has to play its role to counter the rising
core inflation. Therefore, we expect the central
bank to tighten further its monetary policy,
enhancing the carry adjusted volatility and
propelling the TRY.
EMEA – regional overview
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USD-TRY Turkey: High inflation increases the pressure on the CBRT
1.1
1.3
1.5
1.7
1.9
2.1
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
Jan-
14
1.1
1.3
1.5
1.7
1.9
2.1
Inflation remains an important issue in Turkey. Although headline CPI has decelerated since the summer, core inflation measures have recorded a significant acceleration. The underlying inflationary pressures remain strong, fuelled by a robust domestic demand and weak TRY. The CBRT’s inflation target of 6.3% by year-end appears very difficult to achieve.
High inflation constitutes an important risk factor given Turkey’s wide current account deficit. With the uncertainties surrounding Fed tapering, the combination of high inflation and large external financing need may increase the downward pressures on the TRY.
We continue to believe that the right policy option is to increase interest rates further. Therefore, we retain a constructive view on the TRY as we expect the CBRT to tighten in coming months.
Source: Bloomberg
EUR-ILS Israel: The Bank of Israel will favour weaker shekel
3.10
3.50
3.90
4.30
4.70
5.10
Jan-
02Ja
n-03
Jan-
04
Jan-
05Ja
n-06
Jan-
07Ja
n-08
Jan-
09
Jan-
10Ja
n-11
Jan-
12Ja
n-13
Jan-
14
3.10
3.50
3.90
4.30
4.70
5.10
The unexpected appointment of Karnit Flug as Bank of Israel Governor is an event that should not be overlooked. Like her predecessor, K. Flug has a strong dovish bias and gives a pivotal role to the level of exchange rate. With her nomination and the subsequent new appointments within the board, the dovish stance of the BoI is strongly reaffirmed.
Given the sensitivity of the new Governor to the exchange rate, the BoI may intervene more aggressively to weaken the ILS. The BoI has bought about USD 1.3bn (as of end-Sept) out of 2.1bn in the FX purchases programme announced in May. The central bank still has some USD to buy by year-end but beyond the programme, discretionary buying may increase.
It is also worth emphasising that the BoI can count on the government's support. On 24 October, Finance Minister Yair Lapid said that the government will work with K. Flug to weaken the ILS.
Source: Bloomberg
EMEA at a glance
EUR-CZK Czech Republic: The CNB targets EUR-CZK at 27.00
22
24
26
28
30
32
34
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
Jan-
14
22
24
26
28
30
32
34 On 7 November, the Czech central bank decided to launch FX
intervention to weaken the CZK. The CNB announced that it is ready sell as much CZK needed to maintain EUR-CZK close to 27.00. This intervention policy will be maintained until significant inflationary pressures emerge.
The Czech Republic continues indeed to face a deflation risk despite signs of revival in economic activity. The issue is that the economic recovery is mainly driven a revival of exports, while the domestic demand remains very weak.
The so-called ‘monetary policy relevant inflation’, followed by the central bank, was at an uncomfortably low level of 0.2% in September. Inflation is likely to continue to trend lower with the risk of falling into negative territory in coming months. To counter this risk, the CNB will try reviving inflationary pressures via an increase in import prices. That can only be done with a persistently weak CZK in coming quarters.
Source: Bloomberg
36
Macro Currency Strategy November 2013
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For full details of the construction methodology of
the HSBC REERs, please see “HSBC’s New
Volume-Weighted REERs” Currency Outlook
April 2009.
The value of a currency Since FX prices are always given as the amount of
one currency that can be bought with another, the
inherent value of a currency is not defined. For
example, if EUR-USD goes up, this could be
because the EUR has increased in value, the USD
has decreased in value, or a combination of both.
One possible method for getting some insight into
changes in the value of a currency is to look at
movements in the value of a basket of other
currencies against the currency of interest. For
example, if EUR-USD increased over some time
period, one could see how EUR had performed
against a range of other currencies to determine
whether EUR has become generally more valuable
or whether this was simply a USD-based move.
An effective exchange rate is an attempt to do this
and to represent the moves in index form.
There are two main approaches to building an
effective exchange rate: Nominal Effective
Exchange Rates (NEERs) and Real Effective
Exchange Rates (REERs). NEERs simply track
the weighted average returns of a basket of other
currencies against the currency being investigated;
REERs deflate the returns in an attempt to
compensate for the differing rates of inflation in
different countries. The reason for doing this is
that, particularly over long time frames, inflation
can have a large impact on the purchasing power
of a currency.
How should we weight the basket? If we are trying to create an index for the change
in value of a currency against a basket of other
currencies, we now need to decide on how to
weight our basket. One possible solution would be
to simply have an equally-weighted basket. The
rationale for this would be that there is no a priori
reason for choosing to put more emphasis on any
one exchange rate. However, this could clearly
lead to the situation where a large move in a
relatively small currency can strongly influence
the REERs and NEERs for all other currencies.
To avoid this, the indices are generally weighted
so that more “important” currencies get higher
weighting. This, of course, begs the question of
how “importance” is defined.
Trade Weights
Weighting the basket by bilateral trade-weights is
the most common weighting procedure for
creating an effective exchange rate index. This is
because the indices are often used to measure the
likely impact of exchange rate moves on a
country’s international trade performance.
Volume Weights
The daily volume traded in the FX market
dwarves the global volume of physical trade.
From this it is possible to make a convincing
argument that the weighting which would be
really important would be to weight the currency
basket by financial market flows, rather than
bilateral trade.
HSBC Volume-Weighted REERs
Mark McDonald FX Strategist HSBC Bank plc +44 20 7991 5966 [email protected]
37
Macro Currency Strategy November 2013
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To do this properly would require us to have
accurate FX volumes for all currency pairs
considered in the index. However, these are not
available. The BIS triennial survey of FX volumes
only gives data for a small number of bilateral
exchange rates. However, the volumes are split by
currency for over 30 currencies. From these
volumes we can estimate financial weightings for
each currency. We believe that this gives another
plausible definition for “importance”, and one
which may be more relevant for financial
investors than trade weights. We call this
procedure volume weighting and the indices
produced through this procedure we call the
HSBC volume-weighted REERs.
We would argue that if you are a financial market
investor, the effective value of a currency you
would be exposed to is more accurately
represented by the HSBC volume-weighted index
rather than the trade-weighted index.
Data Frequency This is something which is rarely considered
when constructing REERs – inflation data is
generally released at monthly frequency at best so
the usual procedure is to simply create monthly
indices by default. However, some countries
release their inflation data only quarterly. The
usual procedure for these countries is to simply
pro-rata the change over the period. Here there is
an implicit assumption that the rate of inflation
changes slowly. We take this assumption one step
further and assume that it is valid to spread the
inflation out equally over every day in the month.
38
Macro Currency Strategy November 2013
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USD REER index EUR REER index
80
100
120
140
160
Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13
80
100
120
140
160
USD Trade-Weighted REER USD Volume-Weighted REER
1996=1001996=100
60
70
80
90
100
110
120
Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13
60
70
80
90
100
110
120
EUR Volume-Weighted REER EUR Trade-Weighted REER1996=1001996=100
Source: HSBC Source: HSBC
JPY REER index GBP REER index
60
75
90
105
120
Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13
60
75
90
105
120
JPY Trade-Weighted REER JPY Volume-Weighted REER
1996=1001996=100
80
90
100
110
120
130
140
Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13
80
90
100
110
120
130
140
GBP Trade-Weighted REER GBP Volume-Weighted REER1996=100
1996=100
Source: HSBC Source: HSBC
HSBC Volume – Weighted REERs
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CAD REER index CHF REER index
80
90
100
110
120
130
140
150
Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13
80
90
100
110
120
130
140
150
CAD Trade-Weighted REER CAD Volume-Weighted REER1996=1001996=100
60
70
80
90
100
110
120
130
Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13
60
70
80
90
100
110
120
130
CHF Volume-Weighted REER CHF Trade-Weighted REER
1996=1001996=100
Source: HSBC Source: HSBC
AUD REER index NZD REER index
60
80
100
120
140
160
Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13
60
80
100
120
140
160
AUD Trade-Weighted REER AUD Volume-Weighted REER
1996=1001996=100
60
80
100
120
140
Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13
60
80
100
120
140
NZD Volume-Weighted REER NZD Trade-Weighted REER
1996=1001996=100
Source: HSBC Source: HSBC
SEK REER index NOK REER index
60
70
80
90
100
110
Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13
60
70
80
90
100
110
SEK Trade-Weighted REER SEK Volume-Weighted REER
1996=100 1996=100
70
80
90
100
110
120
130
Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13
70
80
90
100
110
120
130
NOK Trade-Weighted REER NOK Volume-Weighted REER
1996=1001996=100
Source: HSBC Source: HSBC
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EUR-USD vs forwards EUR-CHF vs forwards
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
EUR-USD
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60EUR-USDForward Forecast
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
EUR-CHF
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
EUR-CHFForward Forecast
Source: Thomson Financial Datastream, Reuters, HSBC Source: Thomson Financial Datastream, Reuters, HSBC
GBP-USD vs forwards EUR-GBP vs forwards
1.30
1.40
1.50
1.60
1.70
1.80
1.90
2.00
2.10
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
GBP-USD
1.30
1.40
1.50
1.60
1.70
1.80
1.90
2.00
2.10
GBP-USDForward Forecast
0.55
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
EUR-GBP
0.55
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00EUR-GBPForward Forecast
Source: Thomson Financial Datastream, Reuters, HSBC Source: Thomson Financial Datastream, Reuters, HSBC
USD-JPY vs forwards EUR-JPY vs forwards
60
70
80
90
100
110
120
130
140
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
USD-JPY
60
70
80
90
100
110
120
130
140
USD-JPYForward Forecast
85
95
105
115
125135
145
155
165
175
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
EUR-JPY
85
95
105
115
125135
145
155
165
175
EUR-JPYForward Forecast
Source: Thomson Financial Datastream, Reuters, HSBC Source: Thomson Financial Datastream, Reuters, HSBC
HSBC forecasts vs forwards
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3 Month M oney
2009 2010 2011 2012 2013 2014end period Q4 Q4 Q4 Q4 Q1 Q2 Q3 Q4f Q1f Q2fNor th A m er ica x x x
x U S (U SD) 0.3 0.3 0.5 0.4 0.3 0.3 0.3 0.3 0.3 0.3
x C anada (CAD) 0.5 1.2 1.4 1.3 1.2 1.2 1.2 1.2 1.2 1.2Latin Am er ica x x x x x x x x x x x
x M ex ico (M XN) 5.5 4.6 4.4 4.2 4.1 4.1 3.8 3.5 3.5 3.5
x Brazil (BRL) 8.7 11.1 10.4 7.1 7.9 8.6 9.4 9.8 9.8 9.8
x C hile (CLP) 0.5 3.3 5.1 4.9 5.2 5.2 4.8 4.6 4.6 4.6W estern Europe x x x x x x x x x x xEurozone x 0.7 0.9 1.3 0.1 0.1 0.1 0.2 0.1 0.1 0.1Other W estern Europe x x x x x x x x x x x
x U K (GBP) 0.6 0.8 1.1 0.5 0.5 0.5 0.5 0.5 0.6 0.6
N orw ay (N OK) 2.2 2.6 2.9 1.9 1.9 1.8 1.8 1.8 2.0 2.2
x Sw eden (SEK) 0.5 1.8 2.7 1.6 1.3 1.3 1.3 1.3 1.3 1.5
x Sw itzerland (CHF) 0.3 0.2 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0EM EA
Hungary (HUF) 6.0 5.9 7.2 5.8 4.9 4.2 3.7 3.5 3.5 3.5
Poland (PLN) 4.2 4.0 5.0 4.1 3.4 2.8 2.7 2.7 2.9 3.1
R ussia (RUB)* 6.6 4.1 6.4 7.5 7.1 7.1 6.6 6.4 6.0 6.3
Turkey (TRY) 7.5 6.7 10.1 5.5 6.1 6.5 7.5 7.5 7.5 7.5
U kraine (UAH) 16.1 9.1 21.5 18.3 14.3 14.3 18.3 12.3 10.3 9.3South Africa (ZAR) 7.1 5.5 5.5 5.2 5.1 5.5 5.4 5.3 5.1 5.0
Asia/Pacific x x x x x x x x x x x
x Japan (JPY) 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2
x Aus tralia (AUD) 4.0 5.0 4.5 3.0 3.0 2.8 2.6 2.6 2.6 2.6
x N ew Zealand (NZD) 2.8 3.2 2.7 2.6 2.6 2.7 2.7 3.0 3.2 3.4
North As iaC hina (CN Y) 1.7 2.3 3.1 2.6 2.6 2.6 2.6 2.6 2.6 2.6
x Hong Kong (HKD) 0.5 0.3 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4
x Taiw an (TWD) 0.5 0.7 0.9 0.9 0.9 0.9 0.9 0.9 0.9 1.0
x South Korea (KRW) 2.8 2.8 3.6 2.9 2.8 2.7 2.7 2.8 2.8 2.8South Asia
India (INR ) 4.6 9.0 9.8 8.2 8.2 8.5 11.0 10.0 8.0 8.0
x Indones ia (IDR) 7.1 6.6 5.3 5.0 4.9 5.3 7.0 7.2 7.2 7.2
x M alay sia (MYR) 2.2 3.0 3.2 3.2 3.2 3.2 3.2 3.3 3.3 3.5
x Philippines (PHP) 3.9 0.8 1.6 0.6 0.3 0.5 0.5 0.7 0.7 0.7
x Singapore (SGD) 0.7 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4
x Thailand (THB) 1.4 2.2 3.2 2.9 2.9 2.6 2.6 2.7 2.8 2.9Afr ica x x x x x x x x x x x
x South Africa (ZAR) 7.1 5.5 5.5 5.2 5.1 5.5 5.4 5.3 5.1 5.0
No tes : * 1-m o nth mo ney. So urce: H SB C
Important note
This table represents three month money rates. Due to the dislocation in the three month money markets, these rates may not give a
good indication of policy rates.
Short rates
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Source: HSBC
Emerging markets forecast table
14-Nov-13 2012 2012 2013 2014
last Q3 Q4 Q1 Q2 Q3 Q4f Q1f Q2f Q3f Q4f
Latin America vs USD x x x x x x x x x x x x x
Argentina (ARS) 5.98 4.70 4.92 5.12 5.39 5.79 6.25 6.60 7.00 7.35 7.75
Brazil (BRL) 2.33 2.03 2.04 2.01 2.22 2.23 2.30 2.33 2.35 2.38 2.40
Chile (CLP) 521 475 479 472 508 505 500 505 510 510 510
Mex ico (MXN) 13.07 12.86 12.87 12.33 12.98 13.17 12.70 12.60 12.50 12.40 12.40
Colombia (COP) 1931 1800 1825 1826 1827 1828 1950 1925 1900 1900 1900
Peru (PEN) 2.80 2.60 2.55 2.59 2.77 2.79 2.70 2.70 2.70 2.70 2.70
Venezuala (VEF) 6.29 4.30 4.30 6.29 6.29 6.29 6.30 7.80 7.80 7.80 7.80
Eastern Europe vs EUR Czech Republic (CZK) 27.20 25.20 25.10 25.76 25.97 25.74 26.00 27.00 27.00 26.80 26.50
Hungary (HUF) 298 285 291 304 295 297 300 295 295 290 285
Russia v s USD (RUB) 32.70 31.20 30.48 31.00 32.88 32.35 32.90 33.50 34.70 34.80 35.20
Romanian (RON) 4.45 4.40 4.50 4.50 4.40 4.40 4.40 4.40 4.35 4.30 4.30
Turkey v s USD (TRY) 2.04 1.80 1.78 1.81 1.93 2.02 2.00 1.95 1.95 1.95 1.90
Simple rate
Poland (PLN) 4.19 4.12 4.08 4.18 4.33 4.23 4.20 4.10 4.00 4.00 3.90
Middle East vs USD x x x x x x x x x x x x
Egy pt (EGP) 6.89 6.07 6.10 6.80 7.00 7.00 7.50 6.80 6.80 6.80 7.50
Israel (ILS) 3.53 3.90 3.85 3.64 3.70 3.55 3.60 3.60 3.55 3.55 3.50
Africa vs USD South Africa (ZAR) 10.32 8.25 8.48 9.17 9.93 10.06 9.80 9.80 9.50 9.30 9.20
Interest rates 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
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end period 2009 2010 2011 2012 2012 2013 2014Q4 Q4 Q4 Q3 Q4 Q1 Q2 Q3 Q4f Q1f Q2f Q3f Q4f
Americas x
x Canada (CAD) 1.05 0.99 1.02 0.98 1.00 1.02 1.05 1.03 1.05 1.07 1.09 1.10 1.10
x Mex ico (MXN) 13.08 12.36 13.97 12.86 12.87 12.33 12.98 13.17 12.70 12.60 12.50 12.40 12.40
x Brazil (BRL) 1.74 1.67 1.88 2.03 2.04 2.01 2.22 2.23 2.30 2.33 2.35 2.38 2.40
x Argentina (ARS) 3.80 3.97 4.30 4.70 4.92 5.12 5.39 5.79 6.25 6.60 7.00 7.35 7.75x
Western Europe x x x x x x x x x x x x x x
Eurozone (EUR*) 1.43 1.34 1.30 1.29 1.32 1.28 1.30 1.35 1.30 1.28 1.25 1.24 1.24
Other Western Europe x x x x x x x x x x x x x x
x UK (GBP*) 1.61 1.57 1.55 1.61 1.63 1.52 1.52 1.62 1.53 1.51 1.48 1.46 1.46
x Sw eden (SEK) 7.14 6.72 6.86 6.56 6.51 6.50 6.75 6.42 6.46 6.41 6.40 6.45 6.45
x Norw ay (NOK) 5.78 5.81 5.97 5.72 5.57 5.83 6.11 6.01 5.69 5.63 5.68 5.65 5.65
x Sw itzerland (CHF) 1.03 0.93 0.94 0.94 0.92 0.95 0.95 0.90 0.95 0.98 1.00 1.01 1.01x
Em erging Europe x x x x x x x x x x x x x x
x Russia (RUB) 30.2 30.5 32.0 31.2 30.5 31.0 32.9 32.3 32.9 33.5 34.7 34.8 35.2
x Poland (PLN) 2.86 2.95 3.43 3.20 3.09 3.25 3.33 3.12 3.23 3.20 3.20 3.23 3.15
x Hungary (HUF) 188 207 242 222 221 237 227 220 231 230 236 234 230
x Czech Republic (CZK) 18.4 18.7 19.6 19.6 19.0 20.1 20.0 19.0 20.0 21.1 21.6 21.6 21.4x
Asia/Pacific x
x Japan (JPY) 93 81 77 78 86 94 99 98 99 97 95 94 94
x Australia (AUD*) 0.90 1.03 1.03 1.04 1.04 1.04 0.92 0.94 0.90 0.89 0.88 0.87 0.86
x New Zealand (NZD*) 0.73 0.78 0.78 0.83 0.83 0.84 0.77 0.83 0.78 0.77 0.76 0.75 0.75
North Asia x x x x x x x x x x x x x x
x China (CNY) 6.83 6.59 6.29 6.28 6.23 6.21 6.14 6.12 6.12 6.11 6.11 6.10 6.10
x Hong Kong (HKD) 7.75 7.77 7.77 7.75 7.75 7.76 7.76 7.76 7.80 7.80 7.80 7.80 7.80
x Taiw an (TWD) 32.1 30.4 30.3 29.3 29.0 29.8 30.0 29.6 29.3 29.4 29.5 29.6 29.7
x South Korea (KRW) 1166 1121 1159 1114 1064 1111 1142 1075 1070 1075 1080 1090 1095x
South Asia x x x x x x x x x x x x x x
India (INR) 46.4 44.7 53.0 52.9 55.0 54.3 59.5 62.6 62.0 63.0 64.0 65.0 66.0
x Indonesia (IDR) 9425 9010 9068 9570 9638 9718 9925 11580 11100 11200 11300 11400 11500
x Malay sia (MYR) 3.42 3.08 3.17 3.06 3.06 3.09 3.16 3.26 3.18 3.21 3.24 3.27 3.30
x Philippines (PHP) 46.5 43.6 43.8 41.7 41.1 40.9 43.1 43.5 43.0 43.2 43.4 43.6 43.8
x Singapore (SGD) 1.41 1.28 1.30 1.23 1.22 1.24 1.27 1.26 1.25 1.26 1.27 1.28 1.29
x Thailand (THB) 33.3 30.1 31.6 30.8 30.6 29.3 31.1 31.3 31.4 31.6 31.8 32.0 32.2
Vietnam (VND) 18200 19498 21037 20853 20835 20930 21170 21119 21250 21500 21500 21500 21500
Africa x x x x x x x x x x x x x x
x South Africa (ZAR) 7.36 6.62 8.07 8.25 8.48 9.17 9.93 10.06 9.80 9.80 9.50 9.30 9.20
Source HSBC
Exchange rates vs USD
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end period 2009 2010 2011 2012 2013 2014
Q4 Q4 Q4 Q3 Q4 Q1 Q2 Q3 Q4f Q1f Q2f Q3f Q4fVs euro xAmericas x
x US (USD) 1.43 1.34 1.30 1.29 1.32 1.28 1.30 1.35 1.30 1.28 1.25 1.24 1.24x Canada (CAD) 1.50 1.33 1.32 1.27 1.31 1.30 1.37 1.39 1.37 1.37 1.36 1.36 1.36Europe x
x UK (GBP) 0.89 0.86 0.84 0.80 0.81 0.85 0.86 0.84 0.85 0.85 0.85 0.85 0.85x Sw eden (SEK) 10.24 9.02 8.90 8.44 8.58 8.35 8.77 8.69 8.40 8.20 8.00 8.00 8.00
x Norw ay (NOK) 8.29 7.80 7.75 7.37 7.34 7.49 7.94 8.14 7.40 7.20 7.10 7.00 7.00x Sw itzerland (CHF) 1.48 1.25 1.21 1.21 1.21 1.22 1.23 1.22 1.24 1.25 1.25 1.25 1.25
x Russia (RUB) 43.4 40.9 41.6 40.1 40.2 39.8 42.7 43.8 42.8 42.9 43.4 43.2 43.6
x Poland (PLN) 4.11 3.96 4.46 4.12 4.08 4.18 4.33 4.23 4.20 4.10 4.00 4.00 3.90x Hungary (HUF) 270 278 315 285 291 304 295 297 300 295 295 290 285
x Czech Republic (CZK) 26.4 25.1 25.5 25.2 25.1 25.8 26.0 25.7 26.0 27.0 27.0 26.8 26.5Asia/Pacific x x x x x x x x x x x x x x
x Japan (JPY) 134 109 100 100 114 121 129 133 129 124 119 117 117x Australia (AUD) 1.60 1.31 1.27 1.24 1.27 1.23 1.42 1.45 1.44 1.44 1.42 1.43 1.44
x New Zealand (NZD) 1.97 1.72 1.66 1.55 1.60 1.53 1.68 1.63 1.67 1.66 1.64 1.65 1.65
Vs sterling x x x x x x x x x x x x x xAmericas x x x x x x x x x x x x x x
x US (USD) 1.61 1.57 1.55 1.61 1.63 1.52 1.52 1.62 1.53 1.51 1.48 1.46 1.46
x Canada (CAD) 1.69 1.56 1.58 1.59 1.62 1.54 1.60 1.66 1.61 1.61 1.61 1.61 1.61Europe x x x x x x x x x x x x x xx Eurozone (EUR) 0.89 0.86 0.84 0.80 0.81 0.85 0.86 0.84 0.85 0.85 0.85 0.85 0.85xx Sw eden (SEK) 11.53 10.53 10.65 10.59 10.57 9.87 10.24 10.40 9.88 9.64 9.45 9.45 9.45
x Norw ay (NOK) 9.33 9.10 9.27 9.24 9.05 8.86 9.26 9.74 8.70 8.47 8.39 8.27 8.27x Sw itzerland (CHF) 1.67 1.46 1.45 1.52 1.49 1.44 1.44 1.46 1.46 1.47 1.48 1.48 1.48Asia/Pacific x x x x x x x x x x x x x x
x Japan (JPY) 150 127 120 126 141 143 151 159 151 146 140 138 138
x Australia (AUD) 1.80 1.53 1.52 1.55 1.57 1.46 1.66 1.73 1.70 1.69 1.68 1.68 1.70x New Zealand (NZD) 2.22 2.00 1.99 1.94 1.97 1.81 1.96 1.94 1.96 1.95 1.94 1.95 1.95
Source: HSBC
Exchange rates vs EUR & GBP
45
Macro Currency Strategy November 2013
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Notes
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Notes
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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: David Bloom, Daragh Maher, Clyde Wardle, Robert Lynch, Paul Mackel, Stacy Williams, Marjorie Hernandez, Mark McDonald, Murat Toprak, Ju Wang, Julia Wang, Dominic Bunning, Karen Ward and Simon Wells
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For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.
Additional disclosures 1 This report is dated as at 14 November 2013. 2 All market data included in this report are dated as at close 13 November 2013, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
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[394869]
Macro
Currency Strategy
November 2013
Currency
OUTLOOK
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Guiding the EUR lower
Main contributors
David Bloom
Global Head of FX Research
HSBC Bank plc
+44 20 7991 5969
Paul Mackel
Head of Asian FX Research
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6565
Stacy Williams
Head of FX Quantitative Strategy
HSBC Bank plc
+44 20 7991 5967
Mark McDonald
FX Quantitative Strategist
HSBC Bank plc
+44 20 7991 5966
Robert Lynch
Head of G10 FX Strategy, Americas
HSBC Securities (USA) Inc.
+1 212 525 3159
Clyde Wardle
Emerging Markets FX Strategist
HSBC Securities (USA) Inc.
+1 212 525 3345
Marjorie Hernandez
FX Strategist, Latin America
HSBC Securities (USA) Inc.
+1 212 525 4109
Murat Toprak
FX Strategist, EMEA
HSBC Bank plc
+44 20 7991 5415
Dominic Bunning
FX Strategist, Asia
The Hongkong and Shanghai Banking Corporation Limited
+852 2822 1672
Daragh Maher
FX Strategist, G10
HSBC Bank plc
+44 20 7991 5968
Ju Wang
FX Strategist, Asia
The Hongkong and Shanghai Banking Corporation Limited
+852 2822 4340
The November decision to cut interest rates by the ECB may have been
influenced by lower than expected inflation, but we believe the strength
of the EUR was a key consideration. Our central forecast is for the EUR
to continue to weaken.
US data back in the spotlight
With the US debt-ceiling drama over for now, economic data releases
are back in focus. We examine how financial markets have traditionally
responded to data, which markets are most responsive and which
economic variables are now most important. Unemployment data and
survey data are being watched closely but can be hard to interpret as we
see in ‘Taking up the slack’ & ‘Reading UK surveys’.
NOK recovery finally in sight
Bright economic prospects for 2014 favour the NOK.