3 December 2019 What did you miss last month? Currencies Global Tariff rollback in talks, UK Conservatives lead, and rising geopolitical tensions Reports suggest the US and China agree to roll back tariffs in ‘phases’ Conservatives lead in UK General Election opinion polls New record lows for some LatAm currencies versus the USD Key Dates November 1 US non-farm payrolls 128k versus 85k expected November 5 US ISM non-manufacturing 54.7 versus 53.5 expected USD-RMB moves below 7.00 for the first time since August November 7 China reportedly agrees with the US to roll back tariffs in ‘phases’ The Bank of England keeps rates on hold; two members vote for a 25bp cut November 8 The Reserve Bank of Australia’s (RBA) monetary policy statement shows GDP forecast revised lower Canada net change in employment -1.8k versus 15.0k expected November 9 US President Trump describes the amount of tariffs the US is reportedly willing to roll back as “incorrect” November 11 Brexit Party leader Nigel Farage announces the party will not contest Conservative-held seats in the UK General Election November 12 National strike in Chile calls for President Piñera’s resignation November 13 The Reserve Bank of New Zealand keeps rates on hold at 1.00% versus a 25bp cut expected November 14 Australia unemployment rate 5.3% versus 5.2% expected November 19 The Bank of Canada’s Senior Deputy Governor Wilkins says policy rate still has “room to manoeuvre” November 22 US manufacturing flash PMI 52.2 versus 51.4 expected UK services flash PMI 48.6 versus 50.1 expected The European Central Bank’s President Lagarde states monetary policy will “undergo strategic review” November 25 The Federal Reserve’s Chair Powell describes the US economy’s glass as being “more than half full” November 26 The RBA’s Governor Lowe states quantitative easing (QE) not to be considered before a cash rate of 0.25% November 27 YouGov poll points to Conservative majority with 68 seats Currencies ● Global 3 December 2019 Summary – EUR-USD falling asleep The USD index (DXY) gained 0.9%1 in November. Positive US activity data at the start of the month favoured a stronger USD, which also saw a decline in expectations of a Federal Reserve (Fed) rate cut in December. Despite these developments, November proved to be a quiet month for EUR-USD as the pair edged lower in glacial fashion. In fact, EUR-USD one-month realised volatility reached its lowest point in five years, at 3.66, on 29 November, whilst implied volatility reached a record low of 3.90. The GBP slipped 0.1% against the USD in November, displaying little momentum as the market awaited December’s General Election. Data was poor in November for the UK, both activity and inflation releases fell short of expectations. The EUR declined 1.2% against the USD during the month. With no European Central Bank (ECB) meeting for the month and few notable domestic catalysts, EUR-USD found itself pushed lower as strong US activity data reminded the FX market of the disparity in economic dynamics between the Eurozone and the US. ECB President Christine Lagarde gave a speech on the future of the euro economy, stating that monetary policy will undergo “a strategic review” due to begin in the near future. An emphasis was put on the importance of fiscal policy, as the ECB’s struggle with sub-target inflation and slowing growth continues. Elsewhere: Cracks appearing in Latin America (LatAm) Rising geopolitical tensions drove certain LatAm currencies to their weakest ever levels versus the USD over the course of November, including the Brazilian real (4.2765), the Chilean peso (838.33), and the Colombian peso (3,527.13). A notable development was on 12 November, when a national strike was organised in Chile, in order to put pressure on President Piñera to resign. In Brazil, Economic Minister Paulo Guedes dismissed the Brazilian real’s weakness, stating “We have a floating currency, so it floats”, with the market interpreting this as meaning FX weakness would be tolerated. Political tensions also heightened in Colombia during November, amid nationwide protests against tax and pension reforms. November G10 performance % Change versus USD 1.0% 1.0% 0.5% 0.5% 0.0% 0.0% -0.5% -0.5% -1.0% -1.0% -1.5% -1.5% -2.0% -2.0% AUD CHF JPY EUR CAD NOK GBP NZD SEK Source: Bloomberg, HSBC US: The resilient economy The USD index (DXY) gained 0.9% in November. Positive US activity data at the start of the month favoured a stronger USD, which also saw a decline in expectations of a Federal Reserve (Fed) rate cut in December. Despite these developments, November proved to be a quiet month 1 All prices in this report are taken from Bloomberg. 2 Currencies ● Global 3 December 2019 for EUR-USD as the pair edged lower in glacial fashion. In fact, EURUSD one-month realised volatility reached its lowest point in five years, at 3.66, on 29 November, whilst implied volatility reached a record low of 3.90 on the same day. In terms of data, 128k employees were added to US non-farm business payrolls, beating the 85k estimate, in data released on 1 November. However, it was US ISM non-manufacturing that got the ball rolling for the USD, printing at 54.7 versus 53.5 expected. The DXY ended the day up 0.5% – this would be the largest daily move for both the DXY and EUR-USD in the whole of November, highlighting a rather subdued month for the currency pair. Just as the EUR was starting to recover losses against the USD, US PMI data showed an expected expansion in the manufacturing and services sector, on 22 November, after which EUR-USD declined 0.3%. This positive story was reflected in comments from Fed Chair Powell, who described the US economy’s glass as being “more than half full” on 25 November, at the Annual Meeting of the Greater Providence Chamber of Commerce. EUR-USD EUR-USD 1.1200 1.1200 4 November: US factory orders lower than expected Daily change: - 0.3% 1.1150 1.1150 5 November: US ISM non- 25 November: Fed's Powell describes 1 November: manufacturing higher than US economy being a glass "more than US non-farm expected 1.1100 half full" 1.1100 payrolls higher Daily change: - 0.5% Daily change: - 0.1% than expected Daily change: + 0.1% 1.1050 1.1050 6 November: Germany factory orders higher than expected Daily change: - 0.1% 1.1000 22 November: ECB president Lagarde states monetary policy will 1.1000 undergo "strategic review", US PMIs stronger than expected Daily change: - 0.3% 1.0950 1.0950 31-Oct 3-Nov 6-Nov 9-Nov 12-Nov 15-Nov 18-Nov 21-Nov 24-Nov 27-Nov 30-Nov Source: Bloomberg, HSBC Eurozone: Monetary policy to undergo “strategic review” The EUR declined 1.2% against the USD during the month. With no European Central Bank (ECB) meeting for the month and few notable domestic catalysts, EUR-USD found itself pushed lower as strong US activity data reminded the FX market of the disparity in economic dynamics between the Eurozone and the US. For example, on 22 November, lower-than-expected Eurozone services and composite flash PMIs, coupled with stronger-than-expected US flash PMIs, saw EUR-USD end the day down 0.3%. This was a recurrent theme in November, with EUR-USD also falling 0.5% on 5 November on the back of stronger US data. On 22 November, ECB President Christine Lagarde gave a speech on the future of the Eurozone economy. Lagarde stated that monetary policy will undergo “a strategic review” due to begin in the near future, and also emphasised the importance of fiscal policy, as the ECB’s struggle with sub-target inflation and slowing growth continues; however, in terms of market reaction, the speech was rather uneventful. 3 Currencies ● Global 3 December 2019 UK: Gearing up for the General Election The GBP slipped 0.1% against the USD in November, as the market awaited December’s General Election. Data in the UK was poor during the month, with both activity and inflation releases falling short of expectations. On 22 November, UK flash PMIs showed a contraction in both manufacturing and services sectors. The services PMI was notably weaker than expected as it printed at 48.5 versus a 50.2 estimate. GBP-USD was down 0.6%. The Bank of England (BOE) kept rates on hold, at 0.75%, on 7 November, which was expected, although two policymakers unexpectedly diverged from this decision and voted for a 25bp cut. GBP-USD fell 0.3% on the day following this dovish development. Developments on the political front helped to reverse the GBP losses on 11 November, as Brexit Party leader Nigel Farage announced his party will not contest Conservative-held seats in the General Election. The FX market digested this news as an increased likelihood of a Conservative majority government and, therefore, a Brexit deal being agreed by the UK Parliament. The GBP rose 0.6% against the USD. On 18 November, GBP-USD was buoyed further as weekend polls showed Conservatives building on their lead over Labour. This was repeated on 27 November, when a YouGov poll – which had been one of the few polls to correctly call a hung parliament in 2017 – predicted Conservatives winning by a 68-seat majority, pushing GBP-USD 0.4% higher and above the 1.29 handle.