Currency Outlook The anatomy of a slowdown
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Currencies
Global
October 2019
By: HSBC FX Strategy www.research.hsbc.com
Currency Outlook
The anatomy of a slowdown
With the dynamic of US and global growth
now turning sour, we must consider what
this economic softness means for FX.
We identify the three different phases of
a slowdown, and which phase we are
currently in. As the FX market wakes up to
this shift, we outline which currencies we
expect to outperform.
GBP — three into two, for now
Our GBP forecasts have long been
predicated on Brexit outcomes: No Deal,
a Deal, or No Brexit. However it seems
increasingly improbable that the latter can
occur before the end of 2019. We revise our
year-end forecasts to reflect this view.
Play video with
Dominic Bunning
Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in
the Disclosure appendix, and with the Disclaimer, which forms part of it.
Currencies ● Global
October 2019
Summary
The anatomy of a slowdown (pg 3)
With the dynamic of US and global growth now turning sour, we must consider what this
economic softness means for FX. We identify the three different phases of a slowdown, and
which phase we are currently in. In Phase 1, bad news is good news, as the falling cost of
capital in response to weaker data helps to prop up risky assets and high yielding FX. Phase 2
sees a shift to where bad news is bad news. With less room for rates to fall, weaker economic
activity sees risky assets sell off and safe haven currencies outperform. The big risk is that the
market starts to price in Phase 3, where bad news is terrible news for markets. We believe that
we are firmly in Phase 2 for FX. The USD and JPY are likely to perform well, with gold also
likely to stay supported.
GBP – three into two, for now (pg 12)
Our GBP forecasts have long been predicated on three Brexit outcomes: No Deal, a Deal, or No
Brexit. However, it seems increasingly improbable that the latter can occur before the end of
2019. We revise our year-end forecasts to reflect this view.
Gold update – Going for gold (pg 14)
Gold has rallied significantly this year, topping USD1,550/oz. Prices are benefitting from easier
monetary policies globally, including those of the Federal Reserve. “Safe-haven” flows driven by
economic uncertainty, and geopolitical and trade risks also offer significant support. Although
some of these bullish factors are already digested by the market, we believe prices will remain
high – if volatile – for the rest of 2019. We also believe gold is set to move higher in 2020,
especially if the geopolitical and economic outlooks remain uncertain.
1Currencies ● Global
October 2019
Key events
Date Event
24 October ECB rate announcement
Norges Bank rate announcement
Riksbank rate announcement
30 October Fed rate announcement
BoC rate announcement
31 October BoJ rate announcement
5 November RBA rate announcement
7 November BoE rate announcement
13 November RBNZ rate announcement
Source: HSBC
Central Bank policy rate forecasts (%)
Last Q4 2019(f) Q2 2020(f)
USD 1.75-2.00 1.50-1.75 1.50-1.75
EUR 0.00/-0.50 0.00/-0.50 0.00/-0.50
JPY -0.10 -0.10 -0.10
GBP 0.75 0.75 0.75
Source: HSBC forecasts for Fed funds, Refi rate/Deposit rate, Overnight Call rate and Base rate
Consensus forecasts for key currencies vs USD
3 months 12 months
EUR 1.11 1.14
JPY 105.8 104.6
GBP 1.218 1.273
CAD 1.325 1.311
AUD 0.673 0.683
NZD 0.636 0.644
Source: Consensus Economics Foreign Exchange Forecasts September 2019
2Currencies ● Global
October 2019
The anatomy of a slowdown
With the dynamic of US and global growth now turning sour…
…We must consider what this economic softness means for FX
We identify where we are now out of three phases of a slowdown
It is clear that the broader economic cycle is turning for the worse. Data has been worsening for
some time, with this downturn accelerating in recent months. Our colleagues in both equity
strategy and credit strategy have both used machine learning techniques to highlight that we
are getting closer to bear markets in their respective asset classes (see Global Credit Strategy
by Song Jing Lee et al. and Equity Data Science: Detecting Cycles, by Alastair Pinder).
FX markets don’t have the same clear-cut definitions of a bull or bear market. But with the
dynamic of US and global growth now so clearly turning sour, we must consider what this
economic softness means for FX.
We believe that an economic slowdown has three broad phases for FX markets. The
phases are outlined in the diagram on page 4. The reaction function of FX will vary based on
which phase we are in. We define the three broad phases that currencies go through as the
economic cycle turns for the worse as:
Phase 1: Bad news is good news
Softer data see rate cuts priced in; the lower cost of capital across the curve supports “risky
assets” including higher yielding FX at the expense of the lower yielding, funding currencies; FX
also responds in a relative fashion to who is cutting rates further and faster; cross-asset
correlation remain relatively low and local stories are a source for differentiation.
Phase 2: Bad news is bad news
Economic growth slows further but rate cuts are now priced in, so the cost of capital struggles to fall
further; risky assets and high yielding FX start to come under pressure as the nominal yields on offer
no longer look attractive given the growing risk of recession; safe havens – for FX this means the
USD and JPY – start to outperform as capital repatriation becomes more of a focus; financial
markets start to move in a choppier, more volatile manner and signs of dislocation creep in.
Phase 3: Bad news is terrible news
Growth continues to deteriorate and with traditional measures exhausted, policy makers turn to
increasingly unconventional steps to shore up their economies (QE, negative rates, MMT);
currency wars become more prevalent, which could see even safe haven currencies weaken
relative to gold, where there is limited intervention risk; “risky assets” fall sharply and market
dislocations become more widespread.
34
Data Phase 1
Bad news = good news
Anatomy of the
Phase 2 Slowdown
Bad news = bad news
- Weaker data
- Rate expectations
decline
- Cost of capital falls
across curve
- ”Risky assets”
appreciate Phase 3
- High yield FX - Growth slows further Bad news = terrible news
Expansion supported - Rate cuts now
priced in
- Stickier cost
of capital
- Increased volatility
- FX safe havens
appreciate
- Growth even weaker
- ”Risky assets”
fall sharply
- Widespread market
dislocations
- Unconventional
policy measures
Adjustment restarts cycle - FX safe havens
strengthen further
- Higher risk of
currency wars
Time
Source: HSBC
Currencies ● Global
October 2019
Currencies ● Global
October 2019
1. US cycle is clearly slowing – but what "phase" are we in for FX?
ISM Manf. 3m avg, LHS US GDP, % q/q, ann. , RHS
65 10
8
60 6
55
4
2
50 0
-2
45 -4
40
-6
-8
35 -10
Jan-90 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10 Jan-14 Jan-18
Source: Bloomberg, HSBC
Through the phases
Of course some cycles never get to Phase 2 or 3. Sometimes the initial adjustment lower in
rates and the bounce in financial conditions seen in Phase 1 allows the economic expansion to
resume. Even if Phase 2 does emerge, it might create a significant enough adjustment in risky
assets and valuations that helps the economic cycle to pick up steam again, meaning we never
get close to Phase 3. Markets may also vacillate between different phases – particularly Phases
1 and 2 – as financial market adjustments may briefly support data before it turns down again.
In the last thirty years, the US cycle has seen a number of slowdowns, with varying degrees of
severity (Chart 1).
The questions we answer in this piece are: what Phase of the slowdown are we currently in
and what does it mean for FX?
Phase in, phase out
We believe we are firmly in Phase 2, with markets potentially needing to price in Phase 3. The
market seems less convinced and has even attempted to try the Phase 1 playbook in recent
weeks. This could make any possible shift from Phase 2 to Phase 3 even more jarring.
It’s the hope that kills you
As any English cricket fan of the last thirty years will tell you, it isn’t losing games that hurts.
What’s really painful is getting into a position where you should be winning, and then collapsing
to a humiliating loss. Markets are potentially setting themselves up for similar pain.
Bad news: from good news to bad news
In the last few years, as the global data pulse started to gradually slow, there was something of
a “bad news is good news” approach to economic data. In particular, as US data started to
underperform, market sentiment appeared to be buoyed by the idea that the Fed would cut
rates. This lower cost of capital would more than offset any decline in growth. This is Phase 1.
We can see this in the FX market in Chart 2 where we look at the relationship between AUD-JPY
– traditionally very “risk on-risk off” currency pair – and negative US data surprises. The red line
shows the correlation between these indicators, and the grey line the beta, since 2017.
For most of 2018 the reappraisal of rate expectations following disappointing activity data helped
to buoy risky assets. This is Phase 1 where bad news is good news. As such AUD-JPY
displayed a generally negative correlation to negative US data surprises. When US data was
worse than expected, AUD-JPY tended to rally.
5Currencies ● Global
October 2019
It now seems that this is no longer the case, with the market’s risk-off reaction to waning activity
data starting to dominate. Since the slowdown has become more dramatic in the last few
months, and particularly as the US data has slowed more markedly, the correlation appears to
have flipped back into positive territory. This is Phase 2 where bad news is bad news. In
other words, the recent disappointing data out of the US have been associated with falls in
AUD-JPY. The scale of those currency movements has also been larger than previously, as we
observe a rise in the beta coefficient.
2. Bad news is now bad news – weaker US data linked to weaker AUD-JPY
AUD-JPY relationship with negative US activity data surprises
1-quarter correlation (lhs) 1-quarter beta (rhs)
0.8 0.02
0.4 0.01
0.0 0.00
-0.4 -0.01
-0.8 -0.02
Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19
Chart based on daily returns when HSBC US economic activity surprise index registers a decline of 0.5 or greater standard deviations
Source: Bloomberg, HSBC
This is one sign that we have moved more firmly into Phase 2 for FX, in our view. But there are
also other indicators we are tracking.
Rate cuts – no distance left to run
As the broader economic data has been weakening for some time, with little sign of
improvement, we have already seen a large reaction in interest rate expectations lower. Policy
rates are close to or even below zero in many economies, and there appears to be little room
for further rate adjustment to the downside (Chart 3). This pushes us firmly towards Phase 2, in
our view. If rates cannot move much lower then there is little room for easing expectations to
offset weaker growth expectations. Without the offset of a lower cost of capital, bad news is
bad news. This is a clear sign of being in Phase 2.
3. Rates already adjusted a long way 4. Volatile USD funding costs
USD EUR GBP JPY USD FRA-OIS spread 3m, bp, LHS
1Y1M forward interest rates 20d range bp, RHS
3.0 3.0 60 30
2.5 2.5 50 25
2.0 2.0
40 20
1.5 1.5
1.0 1.0 30 15
0.5 0.5
20 10
0.0 0.0
10 5
-0.5 -0.5
-1.0 -1.0 0 0
Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-13 Jan-15 Jan-17 Jan-19
Source: Bloomberg, HSBC Source: Bloomberg, HSBC
6Currencies ● Global
October 2019
Given the lack of monetary policy room, there has been increasing noise around even more
unconventional policies – for example Modern Monetary Theory. And there are signs of
dislocation in some markets such as the recent volatility in shorter-dated USD funding costs
(Chart 4). While some of these market movements may be post-rationalised, the increase in
volatility is an underlying sign that we are moving from Phase 1 where bad news is good news,
to Phase 2, where bad news is bad news.
Phase shift
We also believe that the performance of certain currencies and assets is looking more like
Phase 2 or potentially Phase 3. One example is the breakdown in positive correlation between
Gold and of some major commodity-driven, “risk on” currencies. This tells us a lot about where
we might be in phases.
In Phase 1, we would expect the relationship between Gold and the likes of the ZAR and AUD to
be relatively strongly positive. Bad news boosts commodity producer currencies as “risk on” assets
while also boosting gold as an “anti-dollar” trade in a world of falling US rates. However, as we
shift into Phase 2 and potentially into the pricing of Phase 3, there should be a divergence as Gold
acts increasingly like a safe haven. Bad news becomes bad news and investors seek safety while
selling those currencies most exposed to global growth dynamics – such as commodity producers.
This divergence between commodity currencies and gold has been increasingly stark in 2019
(Charts 5 and 6).
5. Gold has gone from industrial metal to 6. Correlations breaking between
safe haven commodity producers and gold
Gold Index 1-Jan-2000 = 100 AUD-Gold correlation 200d
ZAR-USD Index 1-Jan-2000 = 100 ZAR-Gold correlation 200d
150 150 0.6 0.6
140 140 0.5 0.5
130 130 0.4 0.4
120 120 0.3 0.3
110 110 0.2 0.2
100 100 0.1 0.1
90 90 0 0
Jan-16 Jan-17 Jan-18 Jan-19 Oct-16 May-17 Dec-17 Jul-18 Feb-19 Sep-19
Source: Bloomberg, HSBC Source: Bloomberg, HSBC
Return of RORO?
Another signal that is flashing a warning light that we are in Phase 2 – or even venturing into
Phase 3 – is from HSBC’s “Risk On – Risk Off” (RORO) indicator. This tracks a range of cross-
asset correlations, which appear to be rising again. In the more “normal” times that might be
associated with Phase 1, these cross-asset correlations tend to be lower. This was the case in
mid-2018 as can be seen by the prevalence of yellow, green and light blue in first heatmap
below, which indicate weak cross-asset correlations. In these periods, relative stories matter for
each asset, driving differentiated performance.
However, as the economic slowdown enters Phase 2 and beyond, markets become more
stressed and these correlations tend to move to the extremes – meaning either strongly positive
correlations or strongly negative correlations. This is what we see in the most recent data shown
in the second heatmap. Here, there is greater coverage of both darker red and blue areas which
show higher correlations (see Data Matters from 4 September for more detail on this subject).
7Currencies ● Global
October 2019
7. Mid-2018 saw quite differentiated cross- 8. Now stronger correlations across assets
asset performance – both positive and negative
Source: Bloomberg, Refinitiv Datastream, HSBC Source: Bloomberg, Refinitiv Datastream, HSBC
Euro is Phased out
A good example of how various currencies might perform during a slowdown comes from the
Eurozone over the last few years. Here, the performance of the EUR versus those currencies
most closely linked to the region is very instructive of currencies going through the Phases.
By the middle of 2018, Eurozone economic activity had clearly peaked. In reality the PMI’s had
been pointing to this slowdown since early 2018, but it took some time for markets to take the
hint. As the market started to shift its ECB rate expectations from hikes to neutral to eventually
factoring in cuts, this was taken as a relatively positive development for EUR-linked currencies.
This is a classic example of Phase 1.
Chart 9 shows the performance of a range of EUR-linked currencies in H2 2018 versus the
2018 growth rates in those economies. Generally speaking, these currencies rallied as their
domestic backdrop remained pretty strong whilst the shift towards an easing bias in the
Eurozone was deemed to be a positive indicator for these economies and their financial
markets. Although they might suffer some collateral economic damage from a slowing Europe,
the expected ECB easing would more than make up for this, and led to local currency
appreciation versus the EUR. So bad news was good news.
9. Slowdown in Eurozone was originally negative for the EUR
GDP growth, 2018, % y/y, LHS H2 2018 FX vs EUR, %, RHS
6 6
5 5
4 4
3 3
2 2
1 1
0 0
-1 -1
-2 -2
-3 -3
-4 -4
PLN HUF RON CZK NOK SEK EUR
Source: Bloomberg, HSBC
8Currencies ● Global
October 2019
In 2019, this changed dramatically. The Eurozone slowed further, and those economies most
closely linked to it also saw softer growth. But actually the underlying rates of growth in most of
these economies was pretty resilient. However, now bad news became bad news. Chart 10
shows the relationship between growth and FX performance in 2019. The difference from the
prior chart is clear. All of these EUR-centric currencies weakened versus the EUR, despite the
fact that Eurozone growth was much weaker than in their local economies, and despite the fact
the ECB actually eased policy by announcing another round of QE and cutting rates.
10. But EUR-centric currencies have weakened versus the EUR in 2019, even though the
Eurozone economy is doing much worse
GDP growth, 2019f, % y/y LHS 2019 FX vs EUR, % RHS
6 6
4 4
2 2
0 0
-2 -2
-4 -4
-6 -6
-8 -8
HUF PLN RON CZK NOK SEK EUR
Source: Bloomberg, HSBC
So the Eurozone and its close neighbours clearly experienced a shift from Phase 1 of the
slowdown, where easing expectations help to provide support to markets, to Phase 2, where
easing expectations are no longer enough. If anything, the growing fear for many of these
currencies is that there is now little-to-nothing left in the locker to shore up growth, should it slow
further. The ECB appears to have done all it can, while local policy remains remarkably
accommodative in these Euro-centric economies in light of an impending slowdown. This could
see the market starting to think about pricing in Phase 3.
The rest of the world looks set to follow in a similar pattern on a wider scale, with the USD
playing the role of the EUR. So the USD is, in our view, likely to outperform even though its
own economy is slowing.
Phases set to stun for FX
There appears to be an increasing dissonance in markets as to whether we are in Phase 1, Phase 2,
or even potentially heading into Phase 3. While it should be clear to all market participants that the
economic slowdown is gathering speed, the question of what this means for FX is still yet to be
answered. Given the changes in correlations, increasing signs of market dislocations and volatility,
and the lack of flexibility left for policy adjustment, we firmly believe we are in Phase 2.
Phase 2 and 3 – return of RORO and safe havens
The shift into Phase 2 suggests that we are moving back into a “Risk On-Risk Off” world. It will
not come as a revelation that the currencies which have performed well during these periods in
the past have been the “safe havens”: USD, JPY and Gold should do well. We do not expect
there to be a big difference this time around. While correlations with RORO are not stable over
time, this is often because RORO is not always the driving force in markets. When it regains its
prevalence, the same currencies and assets tend to perform much more consistently. In some
ways, this familiarity might be a crumb of comfort should markets shift through the Phases.
9Currencies ● Global
October 2019
Two factors which might limit some of the room for the safe havens to outperform are valuation
and positioning. Various measures of the latter show that the USD and JPY are already widely
held “longs” by the speculative community. But positioning usually acts more as a short-term
force, and is unlikely to make much of a dent if a move through the Phases becomes more
structural. Valuation can act as a longer-term structural force, and there are signs the USD is
broadly overvalued (Chart 11). However, history also shows us that currencies can remain
misaligned on a valuation front for many years. As such we do not think either of these would
act as a major constraint to USD or JPY strength.
11. USD looks overvalued against many currencies
Source: HSBC, Refinitiv Datastream
Policymaker pushback?
As opposed to forces that will limit any FX adjustment, there is also a big risk that the market
still hopes we are in Phase 1, when in fact the forces for Phase 3 are gathering momentum.
This could make the FX adjustment even sharper. Against a backdrop of currently benign
volatility, that could be jarring for financial markets. The pace of any move might bring about
fears of a reaction from policy makers.
For example, if the JPY were to appreciate aggressively, especially because of global
considerations rather than local ones, then expectations around MoF and BoJ intervention to
offset the move might increase. We are not necessarily convinced that threat is likely to be so
strong this time around, however. The overriding concerns about trade wars and currency pacts
might curb such action (see Tariffonomics and FX, 16 July 2019).
Similarly, one potential threat to our view for ongoing USD strength is an explicit “weak dollar”
policy by the US administration. We address this recently when we stress-tested our USD view
(see Currency Outlook: Stress testing the USD bull, 13 September 2019). The threat of a tit-for-
tat currency war seems all the greater since policymakers have such limited room for other
forms of loosening.
Faced with the possibility of Phase 3 scenario, something that could be shepherded in by rising
fears of a US recession (Chart 12), financial markets might see even more uncertainty than in
previous cycles. With barely any conventional policy room left, little sign of global coordination
and rising recessionary risks, there might need to be an even bigger adjustment in financial
markets or an even greater emphasis on unconventional and untried policy solutions. An
obvious winner in this world might be gold, which has already started to outperform a range of
fiat currencies this year (Chart 13).
10Currencies ● Global
October 2019
12. US recession probability increasing 13. Gold already outperforming G3 FX
New York Fed - US Recession Probability in next 12m Gold in USD Gold in EUR Gold in JPY
50 50 190 190
Index , 1 Jan 2010 = 100
40 40 170 170
30 30 150 150
20 20 130 130
10 10 110 110
0 0 90 90
Jan-85 Jan-91 Jan-97 Jan-03 Jan-09 Jan-15 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18
Source: Bloomberg, HSBC Source: Bloomberg, HSBC
Conclusion
The global economy is slowing. What this means for FX depends on which Phase of the
slowdown we are in. Markets are not sure if bad news is good news, or if bad news is bad news.
This puts them somewhere between Phase 1 and 2. We believe we are firmly in Phase 2, with
the growing risk of the need to price in Phase 3, where bad news is terrible news. Other
financial markets – equity and credit in particular – also suggest that we are likely moving into a
downturn. As the FX market wakes up to this shift, we expect the USD and JPY to outperform.
11Currencies ● Global
October 2019
GBP – three into two, for now
Our GBP forecasts have long been predicated on Brexit, and assigning values for the currency
based on different Brexit scenarios. We still believe that, ultimately, there are only three possible
outcomes for Brexit itself: No Deal, a Deal or No Brexit. In the scenarios, we believe that GBP-
USD would trade at 1.10, 1.45 and 1.55 respectively (see GBP gets our vote, 16 January 2019
for a full explanation of these conditional forecast).
However, as we move into the end of the year it seems increasingly improbable that the latter
can occur before the end of 2019. There simply isn’t enough time, even if there were a strong
enough will, for this outcome to occur in 2019, in our view. If we shift the probability of a No
Brexit before the end of 2019 to 0%, and reassign across the other two outcomes, we are left
with a year-end forecast of 1.28 – halfway between the 1.10 No Deal outcome and the 1.45
view if a Deal is agreed. Given the way GBP has behaved, it seems the FX market is still
applying a slightly higher probability to the No Deal outcome.
1. New probabilities, new forecast for end-2019
Deal
1.45
50%
No Deal No Brexit
1.10 1.55
GBP-USD
1.28
Source: HSBC
Looking further ahead, all three outcomes appear to remain in play although each also faces
some hurdles.
No Deal remains the default option if nothing else is agreed. However, the passing of the
Benn Act in September 2019, which forces the Prime Minister to seek an extension before 31
October – the current default leaving date – if a deal has not been agreed, is an important
impediment. Not only does it legally make it very hard for No Deal to happen by the end of this
month, but it also shows that MPs are willing to vote to ensure against a No Deal outcome. Until
this point it had not been clear that MPs would be explicitly willing to do so.
That said, while MPs have created a stronger force stopping No Deal, there is still little sign that
they are coalescing around any specific Deal with the EU. The views of those who have come
together to support the Benn Act range from those who were happy with the current Withdrawal
Agreement – Northern Irish backstop and all – to those who would prefer a second referendum of
some kind, and those who are explicitly against Brexit. So a Deal seems as far off as ever right now.
12Currencies ● Global
October 2019
This suggests political uncertainty will continue even after 31 October. A general election – potentially
on 26 November or 5 December according to different media reports – could be the next phase for
domestic politics. This could create more certainty for the Brexit process. For example, if the
Conservative Party were to win a majority, then they would be able to press ahead with No Deal if
they chose to do so. This would push GBP lower. On the flip side, some kind of coalition involving
Labour and other smaller parties could bring a second referendum back to the table, raising the
possibility of a No Brexit outcome and the greater pricing of a 1.55 potential level for GBP-USD.
That said, with increased voter volatility in recent years, as shown by the British Election Study in a
recent report, no election outcome is guaranteed. GBP could be faced with another hung parliament,
no clear majority view on Brexit and a slowly deteriorating economy. The pound has been pushed
and pulled by politics for the last few years, and it may continue to be so for the foreseeable future.
13Currencies ● Global
October 2019
Gold update – Going for gold
Gold is boosted by a cocktail of easier global monetary policies,
economic uncertainty, and trade and geopolitical risks
Heavy ETF and Comex net long purchases a plus; gold faces
headwinds from eroding physical demand and firm USD
We see room for further upside; we increase our average and
end-of-year price forecasts across the board
Gold outlook
James Steel
Chief Precious Metals Analyst Gold has rallied significantly this year, topping USD1,550/oz. Prices are benefitting from easier
HSBC Securities (USA) Inc. monetary policies globally, including those of the Federal Reserve. “Safe-haven” flows driven by
james.steel@us.hsbc.com
+1 212 525 3117 economic uncertainty, and geopolitical and trade risks also offer significant support. Although some
of these bullish factors are already digested by the market, we believe prices will remain high – if
volatile – for the rest of 2019. We also believe gold is set to move higher in 2020, especially if the
geopolitical and economic outlooks remain uncertain. The bulk of gains are most likely already in the
market, however, and further rallies may be limited. We expect trading to be volatile.
Monetary policies bullish; physical market erosion, firm USD bearish
Low yields and mounting levels of negatively yielding sovereign bonds are price supportive as
they eliminate or reduce the opportunity cost of owning bullion. Continued easy monetary
policies will likely support gold. Expectations of Fed or other central bank rate cuts will likely also
continue to buoy gold, but much of this may already be factored into prices and therefore be of
diminishing bullish influence going forward. An obstacle to further rallies is likely to be the USD.
HSBC’s FX view is for a firm USD through 2019 and into 2020. High prices in local currency
terms in key EM consumer nations have notably eroded underlying physical demand and will
likely be a major headwind to any rallies in 2020. Meanwhile, scrap supplies are rising.
Weakening physical markets have historically played a key role in undermining past rallies.
Investment
Record higher net long positions on the Comex and robust ETF accumulation has been the hallmark
of this year’s rally. We look for further gains in both, based on likely steady “safe-haven” demand as
investors respond to elevated risks and low yields. But the rapid accumulation of longs leaves the
market open to profit taking and this is likely to introduce an element of greater volatility into the
market through 2020. Central banks have also accumulated substantial amounts of gold this year
and are playing a key, if little discussed, role in aiding higher gold prices.
1. HSBC average gold price forecasts
USD/oz ______ 2019f________ _______2020f _______ ______ 2021f _______ ____ Long Term_____
Old New Old New Old New Old New
Gold 1,362 1,398 1,370 1,560 1,380 1,525 1,350 1,425
Note: Long term = five years. Year-end 2019 and 2020 forecasts are USD1,555/oz and USD1,605/oz, respectively. Source: HSBC
14Currencies ● Global
October 2019
Investment key to prices
The flows are going back to gold
Gold prices have moved substantially higher so far this year after a generally uninspiring
performance in 2018. After moving in a narrow and sluggish range for the first 5 months of the year,
gold shifted gears into a full-fledged rally from June onwards. The turning point for gold over the
summer resulted from a powerful cocktail of Fed rate cuts, the inversion of the US yield curve,
easier monetary policies outside the US, the growing volume of negatively yielding sovereign bonds
globally, escalating trade and geopolitical risks, and stock market wobbles. The combination of
these factors created sufficient investor uncertainty to trigger significant “safe-haven” demand, with
capital flows going to hard assets, notably gold. We think some combination of these factors will
continue to buoy gold next year. The going may be more difficult, however. Headwinds include a
likely firm USD and notably, eroding physical demand, centered in the emerging world. We revise
our 2019, 2020, 2021, and long-term average price forecasts to USD1,398/oz, USD1,560/oz,
USD1,525/oz, and USD1,425/oz, respectively, from our previous forecasts of USD1,362/oz,
USD1,370/oz, USD1,380/oz, and USD1,350/oz, to reflect elevated risks and “safe-haven” demand.
We forecast end of year prices for 2019 and 2020 at USD1,555/oz and USD1,605/oz. For 2020, we
anticipate a range of USD1,395-1,705/oz.
Monetary policies supportive
The shift in Federal Reserve policy to an easing stance is key to explaining gold’s rally. The Fed
has cut rates twice so far this year. But other monetary authorities have also turned to easier
policies, aiding gold. HSBC US economists expects another rate cut this year. The shape of the
US yield curve, which flattened and by some measures became inverted in August, is a sign of
the “safe-haven” flows that are also supporting gold. A flat yield curve reduces the opportunity
cost of owning gold. It is not just the shape of the US yield curve or the shift in US monetary
policy that is good for gold. The global trend towards monetary easing is gold positive. It is
widely accepted that US Treasuries and gold represent two of the world’s traditional and most
reliable risk-off assets. The amount of negative yielding government debt globally leads us to
expect that even if gold prices pull back, they will find support. Government debt around the
world is now more than USD16trn, the equivalent of a quarter of sovereign debt (Bloomberg)
and is, by definition, gold supportive. On a historical basis, gold offering a higher yield than
government debt is almost unheard of.
In Bonds in 2025: Lessons from Japan (6 August) the HSBC fixed income research team state
that they expect bond yields to remain low for the following reasons: 1) those central banks with
negative rates are already preparing to further experiment with life below zero, 2) inflation is
likely to stay low, 3) QE is not working to reverse disinflation, 4) debt levels remain excessively
high, and 5) growing interdependence between fiscal and monetary policy. Low bond yields will
at the least offer gold support, we believe.
USD puts up golden headwinds
It is hard to exaggerate the influence of the USD on gold. The two have a natural inverse relationship.
The inverse USD-gold relationship is one of the most stable and enduring relationships in the gold
market, although it is fair to say that the relationship does not move in lockstep and is subject to
temporary breakdown – especially during economic crises – when the two may move higher. The
USD has been volatile this year, but on balance strong. The firmness of the USD has provided an
important headwind to the gold rally. As we have written on many occasions, there are still some key
factors that will continue to support the USD for the rest of the year and well into 2020. The USD
remains a high-yield currency in the G10 space and should therefore benefit from the attraction of
higher yields. A strong USD would present notable, but not insurmountable, headwinds to a gold
rally. That said it is still likely to be one of bullion’s biggest upside obstacles.
15Currencies ● Global
October 2019
Trade and geopolitics center stage
Gold is the focus of “safe-haven” demand. Elevated trade and geopolitical risks, many of which
appear to have risen this year, have funneled funds into gold. There is historical evidence to show
that should trade flows contract, gold prices tend to rally, albeit with a lag. Trade risks appear to be
playing a role in a slowing global economy. Data from Bloomberg show trade growth flows have
begun to contract after slowing this year. Should they contract further or simply remain low, gold is
likely to be well supported. Geopolitical risk is gold positive. Given increased financial market
uncertainties and global economic risks that have some overlap with global political events, we
believe geopolitical risks have had greater impact on gold this year. The World Economic Forum,
IMF, and World Bank estimate that geopolitical risks were higher this year than last and may rise
further in 2020. The IMF and WEF commented earlier in the year that rising geopolitical risks played
a role in their calculus when lowering global GDP forecasts. While periodically these risks ease, a
certain level of risk remains intact, to the benefit of gold.
Investor demand returns
After increasing a modest 2.2moz or nearly 69t in 2018, Exchange Traded Funds (ETFs)
holdings are up more sharply so far this year. At the start of the year, gold ETFs held 71.1moz.
This level has climbed to 81.14moz as of writing, the equivalent of 311t. This includes a
significant one-day increase in ETF offtake in the wake of the June FOMC meeting. We believe
the shift in Fed policy, and still elevated risks and uncertainty will support ETF demand for the
rest of this year and next, but at a more moderate pace. We see investor accumulation easing
next year from the current pace, but remaining firmly positive.
After nearly collapsing in 2H’18 and going net short mid-October for the first time since 2001,
net long positions on the Comex strengthened considerably over the summer. Starting at
14.45moz at the beginning of the year, net long positions are now 30.37moz, just 4moz below
the historical high. Although we look for builds to continue this year, the jump in gross long
positions to more than 38moz and low gross short positions of under 8moz leaves the market
open to profit taking, in our view.
Physical demand erosion
Underlying physical demand for gold – about half of which goes to jewelry – is sometimes little
discussed. Although we remain positive on gold prices, we take into account the rapidly eroding
physical market. This is seen clearly in imports in mainland China and India, two markets that
between them account for nearly two-thirds of global physical demand. Mainland China can attract
the equivalent of as much as 40% of global mine production in imports. Bullion imports in January-
August to mainland China from the two main import centers, Hong Kong and Switzerland, hit 328t
this year. This was a -55% drop from 733t for the same period last year. India is the second-largest
importer of gold in the world. For January-August, India imported 522t, which was down just 1% for
the same period last year. But India’s gold imports in July dropped 55% y-o-y to the lowest level in
three years as demand was curtailed by a rally in prices in local-currency terms to record highs and a
hike in import taxes from 10% to 12.5%. Imports weakened further in August, dropping to just 20t or
-73% from 111t in August 2018. In addition to USD price gains, EM currencies have tended to
weaken against the USD. This boosts gold prices even further in price-sensitive EM economies, thus
eroding demand. In the case of some nations, officially managed import quota may also restrain
import levels.
Since much of the rally in gold occurred in Q3, we do not expect declines in jewelry, bars, and
other categories of demand to show up in the hard data just yet. But we believe the impact of
higher prices is working though the physical markets. This explains our reduced jewelry, coin,
and bar demand for this and next year.
16Currencies ● Global
October 2019
2. Gold: Supply/demand balance actuals and forecasts
(tonnes) 2013 2014 2015 2016 2017 2018 2019f 2020f
Supply
Mine production 3,110 3,203 3,289 3,397 3,442 3,501 3,538 3,593
Official sector net sales -624 -584 -577 -390 -377 -657 -674 -500
Old gold scrap 1,248 1,188 1,121 1,281 1,156 1,168 1,250 1,230
Producer hedging -28 105 13 33 -24 -13 75 50
Total supply 3,706 3,912 3,846 4,321 4,197 3,999 4,189 4,373
Demand
Jewelry 2,726 2,532 2,458 2,101 2,237 2,242 2,121 2,150
Electronics 279 277 262 256 266 268 256 264
Dentistry 23 20 19 18 17 15 15 15
Other industrial uses 54 51 51 50 51 51 51 52
Other fabrication 356 348 332 324 334 335 322 331
Total fabrications 3,082 2,880 2,790 2,425 2,571 2,577 2,443 2,481
Bar hoarding 1,358 780 790 797 782 782 702 755
Official coins 270 205 224 207 188 241 232 242
Medals 101 80 76 68 75 73 76 79
Exchange-traded funds -906 -172 -122 575 206 69 345 150
Total investment demand 823 893 968 1,647 1,251 1,165 1,355 1,216
Total demand 3,905 3,773 3,758 4,072 3,822 3,742 3,798 3,697
Balance = net investment -199 139 88 249 375 257 391 676
Gold price (average, USD/oz) 1,411 1,266 1,160 1,251 1,257 1,274 1,398 1,560
Source: Metals Focus, World Gold Council, GFMS HSBC forecasts
Central banks
Central bank gold demand jumped sharply in 2018, rising to 657t, a 75% increase from 2017. The
bulk of central bank purchases in 2018 were initiated by just a few nations: Russia, Turkey, and
Kazakhstan. That said, a total of 24 central banks bought gold in 2018, some of them for the first
time in decades. The return of China after a long absence is an important development. Demand
remains strong and is up 391t for the first half of this year, with another net 25t purchased in July
and August, according to official data. It is likely that a central bank demand will surpass last year’s
levels – the second highest year on record. EM central banks have increased their official gold
purchasing while European banks have entirely ceased selling. There is a logic to the purchases.
Most central banks are overweight USD reserves, and the need to diversify away from largely US
dollar-denominated reserves makes gold attractive to reserve managers. Conversely, EM central
banks generally hold low levels of gold reserves as a percentage of forex holdings and many are
seeking to increase their holdings. There is also a geopolitical element to bank purchases. While
demand may moderate from these high levels next year, we expect geopolitical and currency risks
to encourage ongoing official sector offtake in 2020. We believe the impact of central bank
demand on the price of gold has been underestimated.
On the supply side
Mining is the single-biggest supply source for gold. 2018 saw global production at a record high
of 3,501t, according to the World Gold Council. But the trajectory of increases in the past few
years has slowed. We believe that output is plateauing, and net gains will broadly cease after
2021 and output will edge gradually lower as the next decade unfolds. We base this on fewer
new projects moving through the production pipeline. Output may fall more markedly long term
as reduced capital expenditures, notably E&P spending, and a lack of new large discoveries,
are set to inhibit output. Recent increases in exploration budgets may not be sufficient or timely
enough to prevent this. Short of an even more robust rise in prices than already seen this year,
a downward trajectory for mine output looks likely. Mine output tends to be slow moving, but has
a long-term role in impacting prices. High prices may encourage greater hedging and forward
selling, which would also add to supply.
17Currencies ● Global
October 2019
Recycling
There is a potentially vast pool of gold scrap, the mobilization of which is boosting supply.
As physical demand for gold is contracting, especially in price sensitive emerging markets, the
supply of scrap for reprocessing is rising. A gold price of USD1,500/oz is historically high and
not only merchants and individuals in emerging markets are boosting scrap supply, but so too
are holders of bullion in western markets, including individuals, merchants, and industrial firms.
The importance of scrap as a component of gold supply has risen over the years and recycled
gold is the most important source of supply after mine output. Higher scrap levels – and the
consequent increase in gold supply – figures in our expectations that gold rallies may run into
headwinds, especially if physical demand slows further in key EM markets. In the past, price
rallies have triggered significant increases in supply. Scrap supplies reached c60% of mine
output when gold prices surged at the peak of the financial crisis. Although little discussed,
increased scrap supplies –along with reduced physical demand – may help restrain the rally.
Summary
Gold is deriving significant “safe-haven” demand from a powerful cocktail of factors including
easing monetary policies globally, increases in negatively yielding sovereign debt, low yields,
the flattening of the yield curve, and elevated geopolitical and trade risks. This has led to a
strong increase in gold-ETF holdings and growth in net long positions on the Comex. The going
is not all one way, however. The notable erosion of physical demand due to high prices from
price-sensitive economies, where the bulk of gold is purchased, and a firm USD present
significant headwinds to further rallies.
18Currencies ● Global
October 2019
G10 at a glance
USD-CAD Canada: Global beats local
We look for the CAD to weaken over the remainder of the year. Were
the currency valued only on the basis of the domestic economy, our
1.50 1.50 bearishness would seem misplaced. The economy has emerged from
the soft patch seen during late 2018 with especially robust growth
1.40 1.40 during Q2 19. Inflation is reasonably close to target.
However, we expect growth to slow from here as the support from
1.30 1.30 those sectors that supported the economy during H1 19 are starting
to wilt. Uncertainty over global trade, notably between the US and
1.20 1.20 China but also including passage of CUSMA legislation, may weigh
further on business investment and export performance. In addition,
1.10 1.10 there are some signs that the upward momentum in wholesale and
retail trade may be fading.
1.00 1.00 The market is not aggressively priced for monetary easing in Canada so
the balance of risks is skewed to the downside for the CAD should the
BoC become more dovish. The upcoming election looks likely to be a
0.90 0.90
tight race with a minority government one possible outcome. A slowing
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 economy, a more dovish BoC and political uncertainty (both at home and
abroad) argue for a weaker CAD in our opinion.
Source: HSBC, Bloomberg
EUR-NOK Norway: Over-rated
10.5 10.5 On 19 September Norges Bank delivered a rate hike on a split
consensus, bringing its deposit rate to 1.50%. The central bank
10.0 10.0 announced this would be the last tightening for some time, with their
policy rate forecasts now on hold through until 2022. In Norges
9.5 9.5 Bank’s March report, these projections had previously envisaged
rate hikes until Q2 2020.
9.0 9.0 With Norges Bank’s hiking cycle – 100bp over the last year – now
over, we see further room for EUR-NOK to move higher as the
8.5 8.5 cyclical support of a hawkish central bank has been removed.
Poor activity data from the US has recently exacerbated concerns of a
8.0 8.0 global slowdown; if this global theme of a deteriorating economic outlook
continues, the NOK is likely to weaken as a risk-on currency. Depressed
7.5 7.5 oil prices from the same scenario would likely weigh the NOK down
further, even as local production is set to ramp up by 440k barrels per day
7.0 7.0 by next summer from its new Johan Sverdrup oil field, as reported by
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Bloomberg. We see EUR-NOK at 10.30 by year-end.
Source: HSBC, Bloomberg
EUR-SEK: Sweden: Risk for the Riksbank hawk
12.0 12.0 At its September meeting, Riksbank reiterated its forward guidance
for raising the interest rate at the end of this year or the start of next
11.5 11.5 year, as it takes on the role of being the G10 hawk from its
Scandinavian neighbour.
11.0 11.0 The central bank cited a positive output gap and inflation close to its 2%
target, however Sweden has subsequently seen downside surprises from
10.5 10.5
both activity and inflation data. Sweden CPIF (CPI exl. mortgage rates),
10.0 10.0 used by Riksbank to measure inflation, fell from 1.5% to 1.3% YoY in
September. The seasonally adjusted unemployment rate rose
9.5 9.5 unexpectedly whilst PMI manufacturing fell to a six-year low. Our
economists’ forecast for Sweden GDP growth in 2019 is well below
9.0 9.0 consensus, at 1.2% (see: Global Economics Quarterly).
8.5 8.5 In our view, the recent economic developments increase the risk that
the tone of Riksbank’s forward guidance turns more dovish at its
8.0 8.0 next meeting on 24 October. In such a case the FX market is likely to
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 revise its expectations, seeing EUR-SEK move higher. Ultimately we
Source: HSBC, Bloomberg see EUR-SEK reaching 11.30 by year end.
19Currencies ● Global
October 2019
Asia – regional overview
Asian currencies have been more or less stable over the past month since the last Currency Outlook, as
the FX market awaits the outcome from the US-China trade talks on 10-11 October. Indeed, in view of
that, and the US Treasury’s upcoming semi-annual report assessing FX policies of the US’s key trade
partners, we conduct a stress test on our modestly bullish USD-Asia views. We explore the likelihood
and consequences of three developments that could materially affect our views. Our conclusion is that
those conditions have not been met but they bear close monitoring ‒ the USD should keep its upper hand
versus Asian currencies for now.
1) A US-China trade deal:
The US and China are scheduled to have another round of high-level trade talks on 10-11 October.
Our base case is that a comprehensive deal is unlikely to be struck in the near-term. Indeed,
Chinese negotiators have reportedly said that they do not intend to discuss reforms on China’s industrial
policy during the upcoming talks (Bloomberg, 7 October). But a reasonably likely and still positive outcome
could entail the US deferring upcoming planned tariffs (raising the existing 25% tariff rate on USD250bn of
Chinese goods to 30% on 15 October, and imposing 15% tariffs on USD160bn of goods on 15 December),
while both sides aim to continue dialogue. In this scenario, we believe the RMB and the KRW would be
slightly stronger, but there could be limited spill-over to other Asian currencies, given lingering uncertainty.
Conversely, if these tariffs materialise, USD-RMB may have to adjust higher again, dragging along other
highly correlated Asian currency pairs, such as USD-KRW, USD-TWD, USD-MYR and USD-SGD.
2) A recovery in growth:
The governments of Thailand, Korea and India have recently announced fiscal stimulus, for example, the
Indian government is implementing a substantial corporate tax cut that could cost 0.7% of GDP. However, in
our view, for Asia’s growth to really rebound and impart a positive impulse to Asian currencies, stability in
China’s economy and an export recovery are necessary conditions too. The former is tied closely to US-China
trade tensions, while the latter is highly dependent on the tech cycle. There are signs of green shoots in the
electronics industry of late – prices of some types of memory chips have stopped falling in Q3 and new orders
for communication equipment rose in August. We will monitor if these signs merely reflect a seasonal pick-up
(and possibly front-loading ahead of potential US tariffs in December), or if these are a prelude to a sustainable
upturn related to the rollout of 5G technology. Our base case is that a 5G-led recovery is more likely a Q2
or H2 2020 story. But if we are wrong, the KRW could be the first and biggest beneficiary.
3) A weak USD policy:
The US Treasury is due to release its next report on currency manipulation sometime in October or
November, which suggests the weak USD policy argument could soon get more attention again. Mainland
China was labelled as a currency manipulator in August, and the last report had Korea, Vietnam,
Singapore and Malaysia on the Monitoring List. We expect these statuses to remain unchanged in the
upcoming report. Taiwan and Thailand could be “borderline” candidates for the Monitoring List – both met
the current account surplus criterion, barely dodged the bilateral trade surplus criterion and so the crux
comes down to the US Treasury’s estimates of their respective net FX purchases. In our view, enhanced
scrutiny and the threat of intervention or other repercussions by the US Treasury already seem to be
putting appreciation pressure on the THB and VND, although not so for other Asian currencies yet.
20Currencies ● Global
October 2019
Asia at a glance
USD-CNY Mainland China: Trade talks loom
FTSE Russell did not include China bonds in its World
Government Bond Index (WGBI) at its September review, but
will revisit the decision in March 2020. While this is delayed,
8.5 8.5
China should nevertheless continue to benefit from inflows
related to its inclusion in other bond indices. In any case, locals’
8.0 8.0 net FX purchases in spot have been moderate.
The focus now shifts to US-China trade talks, which are due to
7.5 7.5 start on 10 October. Ahead of the talks, both sides have made
some “goodwill” gestures – the US postponed the round of
October tariffs from the 1st to the 15th, while China is planning
7.0 7.0
to make more agricultural product purchases. However, the
likelihood of a comprehensive deal still seems low, since
6.5 6.5 Chinese negotiators indicated that they would not be
discussing reforms on China’s industrial policy (Bloomberg, 7
6.0 6.0 October). If US tariffs proceed on 15 October, we believe
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 USD-RMB may take another leg higher.
See Asian FX Focus: RMB: Depreciation episodes – what’s
different?, 9 September 2019.
Source: HSBC, Bloomberg
USD-KRW Korea: Monitoring trade talks and memory prices
We believe the Bank of Korea has not been intervening
much YTD to support the KRW. It recently disclosed that it
1600 1600 net sold USD3.8bn in H1. We estimate that intervention was
close to zero in Q3. We believe there is no good economic
1500 1500 reason for the BoK to worry about KRW depreciation given
Korea’s basic balance deficit YTD.
1400 1400 There could be political considerations though. Korea may
1300 1300 remain on the US Treasury’s Monitoring List in the
upcoming currency manipulation report, as the US’s trade
1200 1200 deficit with Korea rebounded to cross the USD20bn
threshold in the 12 months ended June 2019.
1100 1100 But in any case, rather than the BoK’s FX policy, we think
the KRW’s outlook depends more on US-China tensions
1000 1000 and the memory industry. USD-KRW may break above
900 900 1,200 again if trade talks disappoint. However, NAND prices
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 have stabilized and DRAM price declines are easing. In
recent years, turning points of memory chip prices had led
Korea’s tech exports by 1-2 quarters.
Source: HSBC, Bloomberg
USD-MYR Malaysia: The spectre of outflows
FTSE Russell did not exclude Malaysia’s bonds from its
World Government Bond Index (WGBI) at its September
4.6 4.6 review, but will revisit this eligibility issue in March 2020.
4.4 4.4 Next year, there could also be potential bond outflows
4.2 4.2
arising from a reduction in Malaysia’s weighting in another
bond index to accommodate China’s inclusion, and a
4.0 4.0 planned divestment by Norges Bank Investment
3.8 3.8 Management. Moreover, such potential foreign outflows
could be happening when regulations regarding residents’
3.6 3.6 capital outflows and FX purchases are being relaxed.
3.4 3.4 But looking beyond the risk of financial outflows, we notice that
3.2 3.2 some positive tailwinds are gathering for the MYR. Malaysia’s
non-commodity trade balance is at an all-time high. Some of
3.0 3.0 large FDI inflows to the manufacturing sector since the middle
2.8 2.8 of last year could already be materializing as new production
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 capacity ‒ replacing imports and boosting exports.
Source: HSBC, Bloomberg See Asian FX Focus: MYR: The spectre of outflows,
18 September 2019.
21Currencies ● Global
October 2019
USD-SGD Singapore: Fade the acyclical appreciation
Despite the historical tendency for the SGD NEER to fall to
below the mid-point ahead of expected policy easing
announcements, it has rebounded sharply since mid-
1.75 1.75
August. We believe this could be due to (1) M&A inflows –
completed and pending transactions reached a record high
1.65 1.65 in Q3 (Bloomberg filings); 2) Non-resident deposit inflows –
which came in the form of FX deposits in July, but could
1.55 1.55 have subsequently been converted into SGD.
In our view, most of the recent inflows are idiosyncratic and
1.45 1.45 temporary, rather than structural and persistent. Accordingly, we
believe the SGD NEER should weaken again when those
1.35 1.35 inflows cease later. An explicitly dovish Monetary Authority of
Singapore – easing policy on 14 October, hinting at further
1.25 1.25 actions in 2020, accelerating the pace of FX reserves
accumulation – could provide the catalyst for more cyclically-
1.15 1.15 sensitive outflows to reassert their influence on the SGD NEER.
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 See MAS Preview (Oct 2019): Singapore to join the pack, 5
October 2019 and Asian FX Focus: SGD: Fade the acyclical
appreciation, 27 September.
Source: HSBC, Bloomberg
USD-TWD Taiwan: Shored up by “re-shoring”
The TWD has been relatively stable this year due to three
reasons: 1) Resilient electronics exports – reflecting product
diversity (less reliance on the volatile memory chip industry)
35 35
and “re-shoring” of some production from mainland China; 2)
34 34 “Returning” investments and funds – the government is
incentivising companies to invest onshore, which would likely
33 33 support the TWD directly (via income repatriation) or
indirectly (via less outward direct investments); 3) An
32 32 increase in FX hedging activities by life insurance companies
recently, concurrent with a gradual slowdown in the pace of
31 31 their foreign investments (due to regulatory limits).
30 30 In our view, the “re-shoring” of production and investments from
mainland China back to Taiwan should cap USD-TWD even if
29 29 risk sentiment globally remains weak next year, and should exert
downward pressure on USD-TWD otherwise. The TWD may not
28 28 be able to sustain its strength against the KRW if there is a US-
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 China trade deal and if the memory industry rebounds.
See Asian FX Focus: TWD: Shored up by “re-shoring”,
8 October 2019
Source: HSBC, Bloomberg
USD-THB Thailand: Capital outflow liberalisation in Q4
According to a Reuters report on 4 October, the Bank of
Thailand is considering measures to allow residents to invest
43 43 more abroad via intermediaries and directly (for high net
worth investors). The BoT may also reportedly allow
41 41 exporters to keep foreign currency receipts abroad.
39 39 Considering that the current limits for residents’ outbound
portfolio investments are not binding, we believe the latter
37 37
measure could have greater impact on the exchange rate.
35 35 The implications could be similar to when the BoT raised the
limit for onshore FX deposits (for FX funds sourced locally)
33 33 from USD500,000 to USD5m per entity in April 2015.
31 31 Since Thailand’s current account surplus has been so sticky,
one key way to reduce the downward pressure on USD-THB
29 29 from this channel would be to allow residents to hold more
27 27 FX deposits, be it onshore or offshore. In our view, it would
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 be timely to introduce this soon, since the tourism peak
season is November-December, and especially if residents
continue to unwind their gold inventories.
Source: HSBC, Bloomberg
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