Key takeaways
- Much of the adjustment to US rate expectations may be complete for now...
- …further USD gains will be more difficult; we look for consolidation in most G10 FX.
- The ECB and BoJ meetings provide scope for some colour, with downside risks to the EUR and upside risks for the JPY.
Our tactical view
Table of tactical views where a currency pair is referenced (e.g. USD/JPY):An up (⬆) / down (⬇) / sideways (➡) arrow indicates that the first currency quotedin the pair is expected by HSBC Global Research to appreciate/depreciate/track sideways against the second currency quoted over the coming weeks. For example, an up arrow against EUR/USD means that the EUR is expected to appreciate against the USD over the coming weeks. The arrows under the “current” represent our current views, while those under “previous” represent our views in the last month’s report.
USD
The year started with markets looking for 150bp or more of easing this year, while the Federal Reserve’s(Fed) median interest rate expectations pointed to just 75bp of rate reductions. Nearly 75bp of easing has already been taken out of the market curve, which has resulted in a stronger USD. The challenge for the USD from here is that a large portion of the market’s rate reappraisal is likely already complete. The market is currently priced for the first Fed cut in June, in line with our economists’ expectations. The Fed’s next policy meeting is on 19-20 March, which a status quo on policy rate is widely expected. In our view, US Dollar Index (DXY) gains will probably rely more on a dovish European Central Bank (ECB) than a hawkish Fed; while Japan’s intervention threat will likely cap USD gains vs the JPY. As such, DXY is likely to track sideways over the next few weeks.
Short-term direction : DXY^
Current
▶ Track Sideways
Previous
▲ Appreciate
EUR
The wait for wages data prevented a clearer ECB pivot to an easing cycle at the 25 January meeting and helped prevent a steeper EUR retreat. However, the 7 March ECB meeting is likely to pave the way for the pending rate cuts, which may mean the patient narrative is altered. The provisional readings for German, French, and Spanish CPI are out on 29 February; Italian CPI and the Eurozone flash estimate on 1 March. Another dovish surprise might give a further nudge to the ECB’s guidance. Alongside continued economic disappointments in the Eurozone, the case for renewed EUR-USD weakness remains compelling over the near term, in our view.
Short-term direction : EUR-USD
Current
▼ Depreciate
Previous
▼ Depreciate
GBP
Remarkably, the GBP is the second best performing G10 currency so far in 2024 which in part reflects the considerable hawkish reappraisal of the Bank of England’s (BoE) likely policy path. The next BoE meeting will be on 21 March, with markets pricing in the first BoE rate cut to come in August, in line with our economists. The GBP is beholden to rates, and its previous relationship with risk appetite appears to be broken so far this year. As such, the GBP can no longer capitalise on the upside to risk appetite from the US economy’s resilience. By the same token, it should mean the GBP is less vulnerable, should there be a measured correction in global risk appetite. All this points to a range-bound GBP-USD.
Short-term direction : GBP-USD
Current
▶ Track Sideways
Previous
▼ Depreciate
JPY
The Bank of Japan (BoJ) could take a notable step to the exit from ultra-accommodative monetary policy at its 19 March meeting. From now to the BoJ’s meeting, the outcome of the spring wage negotiations will likely be the market focus. Honda will boost wages by 5.6% with a bonus of over seven months’ pay; while Mazda will increase wages by 6.8% (Bloomberg, 21 February 2024). Rengo, Japan’s biggest labour union federation, will release the first collation of its pay deals on 15 March, with further releases in late March and early April. USD-JPY topside is likely to be constrained by the intervention threat and the prospect of an end to BoJ’s yield curve control (YCC) policy. The currency pair also looks stretched relative to its yield differentials. And as indicated by HSBC USD-JPY positioning index, JPY short position is sizeable; and flow data is unlikely to be more negative.
Short-term direction : USD-JPY
Current
▼ Depreciate
Previous
▶ Track Sideways
CHF
After the JPY, the CHF is the worst performing G10 currency so far this year, in part due to its safe-haven status, as global equity markets gained. The CHF has also been hit by the Swiss National Bank’s (SNB) shift in tone around the currency, with FX strength no longer a policy tool or aspiration it seems. We continue to look for a higher USD-CHF over the near term, while EUR-CHF is likely to track sideways.
Short-term direction : USD-CHF
Current
▲ Appreciate
Previous
▲ Appreciate
CAD
In our view, the 6 March Bank of Canada (BoC) meeting is unlikely to be a game changer for the CAD, with the recent decline in inflation likely to be welcomed but without signalling any immediate appetite for a cut. Across rates, oil and risk appetite, the lack of a clear driving trend suggests USD-CAD is likely to continue its choppy sideways path in the coming weeks, in our view.
Short-term direction : USD-CAD
Current
▶ Track Sideways
Previous
▶ Track Sideways
AUD
We think AUD-USD has found a near-term base around 0.6450, but we do not envisage any substantial recovery just yet from both domestic and external drivers. But China’s “Two Sessions” – the annual meetings of the National People's Congress (NPC) and the National People's Political Consultative Conference (NPPCC) – which will kick off on 4-5 March, are worth monitoring.
Short-term direction : AUD-USD
Current
▶ Track Sideways
Previous
▼ Depreciate
NZD
The Reserve Bank of New Zealand (RBNZ) will meet on 28 February, which a hawkish hold is the most likely outcome. Ahead in March, NZD-USD’s drivers may become US-centric again. A pause in Fed repricing and a hawkish Reserve Bank of New Zealand (RBNZ) should keep the NZD supported, in our view.
Short-term direction : NZD-USD
Current
▶ Track Sideways
Previous
▼ Depreciate
Note: ^DXY = US Dollar Index, is an index (or measure) of the value of the USD against major global currencies, including the EUR, JPY, GBP,CAD, SEK and CHF. Source: HSBC
Explanation of terms
FX Data Snapshot (from close on 24 January to 23 February*)
FX |
Spot |
200 dma |
1-month % change* |
Support |
Resistance |
---|---|---|---|---|---|
DXY | 103.88 | 103.73 | 0.25% | 102.40 | 105.00 |
EUR-USD |
1.0830 |
1.0828 |
-0.22% | 1.0770 | 1.0960 |
GBP-USD |
1.2670 |
1.2570 | -0.13% | 1.2150 | 1.2809 |
USD-JPY |
150.61 | 145.68 |
1.52% |
147.94 | 151.36 |
USD-CHF |
0.8808 | 0.8837 | 1.22% | 0.8569 | 0.8912 |
USD CAD |
1.3477 |
1.3478 |
0.12% | 1.3381 | 1.3591 |
AUD-USD |
0.6573 | 0.6564 | -0.11% | 0.6478 | 0.6635 |
NZD-USD |
0.6201 |
0.6078 | 1.62% |
0.6022 | 0.6230 |
Note: *As at 16:18 HKT on 23 February 2024.
Source: HSBC, Bloomberg
Spot: Spot refers to the current market price of a currency pair that is important for immediate transactions.
200 dma: 200-day simple moving average numberrepresents the average price of an index or a currency pair over the past 200 days.
Support (S), Resistance (R):Support and resistance are significant previous lows and highs plus retracement levels, based on historical price patterns of anindex or a currency pair. Support is a historical price level where a downtrend of a currency pair paused due to demand for the first currency quoted in the pair increasing, while resistance is a historical price level where an uptrend of a currency pair reversed amid demand for the second currency quoted in the pair increasing.
HSBC Positioning Indices
Note: Priced as of market close 19 February 2024
Source: HSBC, Bloomberg
The indicators have been devised to track the net position of momentum traders, looking at hundreds of strategies, operating over many different time horizons. It considers time horizons of 5 days up to 260 days. An indicator level of +10 would indicate that the hundreds of different strategies have all lined up and gone long (i.e., buy the first currency quoted in the pair). Similarly, an indicator level of -10 indicates that all strategies are short (i.e., sell the first currency quoted in the pair).
Glossary
Dovish
Dovish refers to an economic outlook which generally supports low interest rates as a means of encouraging growth within the economy.
Hawkish
Hawkish is typically used to describe monetary policy which favours higher interest rates, and tighter monetary controls to keep inflation in check.
MoM / YoY
Month on month / Year on year
PMI
Purchasing Managers Index (PMI) is an indicator of economic health of the manufacturing sector (>50 represents expansion vs. the previous month).
IMM data
International Monetary Market (IMM) is a division of the Chicago Mercantile Exchange (CME) that deals with the trading of currencies and interest rate futures and options and the IMM data is part of the Commitments of Traders (COT) reports published by the U.S. Commodity Futures Trading Commission (CFTC). The IMM data provides a breakdown of each Tuesday’s open futures positions on the IMM. Speculative positions are a trader’s non-commercial positions (i.e. not for hedging purposes).
G10
G10 refers to the most heavily traded, liquid currencies in the world: USD, EUR, JPY, GBP, CHF, AUD, NZD, CAD, NOK, and SEK.
Fed / FOMC
Federal Reserve System (US’s Central Bank)/Federal Open Market Committee.
ECB
European Central Bank (Eurozone’sCentral Bank).
BOE
Bank of England (UK’s Central Bank).
BOJ
Bank of Japan (Japan’s Central Bank).
BOC
Bank of Canada (Canada’s Central Bank).
RBA
Reserve Bank of Australia (Australia’s Central Bank).
RBNZ
Reserve Bank of New Zealand (New Zealand’s Central Bank).
SNB
Swiss National Bank (Switzerland’s Central Bank).
Lagarde
Christine Lagarde, President of the European Central Bank (ECB).
Powell
Jerome Powell, Chair of the Board of Governors of the Federal Reserve System (Fed).
Bailey
Andrew Bailey, Governor of the Bank of England (BOE).
Kuroda
Haruhiko Kuroda, Governor of the Bank of Japan (BOJ).
Important information
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