On the foreign exchange market, the US dollar’s downward trend, which started a few months ago, continues to benefit the euro. The single currency posted a strong month-on-month performance in December. This is also explained by the high concentration of positive news on the central bank front, not to mention the fiscal stimulus measures announced.
The latest highlight in this regard was the agreement reached over a new US economic recovery package, amounting to $900 billion (about half the amount of the previous package, approved in March of last year). Among the key measures that should mitigate the pandemic’s potential post-Christmas intensification in the coming weeks, there are several measures to support the unemployed, as well as a provision of close to $48 billion intended for the purchase of new vaccines, the implementation of tests and prompt vaccination roll-out across the United States.
This good news should continue to feed risk appetite, even if there are still uncertainties regarding the short-term evolution of the virus due to several worrying mutations currently being observed.
Chequered fluctuations were observed for much of December for the EUR/GBP pair, largely in line with the various rumours and plot twists related to EU-UK negotiations. Ultimately, a kind of Christmas spirit seemed to bear an influence on trade talks, with an agreement finally reached at the eleventh hour.
Negotiations will nonetheless continue between both parties, notably in relation to financial services, which represent close to 7% of the British economy. The issue for the British side is to obtain equivalence guarantees that would allow financial institutions based in London to continue offering their services to clients in continental Europe. With the worst of the Brexit negotiations now behind us, notably the spectre of a no-deal outcome, something of a lull period seems to be materialising for the EUR/GBP pair. In the short term, a change of around 0.89-0.90 seems quite coherent with the prevailing circumstances.
Risk appetite also continued to benefit the EUR/JPY pair in December. Last month, the Bank of Japan decided to extend its corporate funding programme by six months, until the end of September 2021.
Moreover, like the Federal Reserve and the European Central Bank, the Bank of Japan also announced its intention to initiate a strategic review of its monetary policy, with a recurring inability to reach its inflation target of 2% coming under scrutiny. Barring any unforeseen circumstances, notably related to the pandemic’s progression, it is very likely that the risk appetite observed in December will persist in the coming weeks.
Minimal variation since the month of December for the EUR/CHF pair (+0.23%). Despite the American Treasury’s decision to place the Confederation on the list of countries manipulating their currency (which may open the door to retaliation measures from Washington), the Swiss National Bank confirmed its intention to continue foreign exchange intervention to slow down the appreciation of the Swiss franc (CHF) and to pursue an extremely accommodating monetary policy in order to support the economy.
Officially, over the first part of 2020, the Swiss National Bank repurchased close to 90 billion CHF worth of foreign currencies (mostly euros) to slow down the rise of the national currency. With a weak economic rebound expected this year (between +2.5% et +3% according to the central bank), all indicators seem to suggest that forex intervention will continue for a while, and that these measures will be sustained throughout 2021. This may allow the EUR/CHF pair to exceed the psychological threshold of 1.10 quite soon, provided that risk appetite persists, as the market anticipates.
The rise of the Canadian dollar on the foreign exchange market in December, which is much more substantial vis-à-vis the US dollar (USD) than in relation to the euro, now represents an issue for the Canadian economy, according to the Bank of Canada (BoC). The BoC warned a few weeks ago against the risks of another drop in economic activity in Canada during the first quarter of 2021, due to the surge in Covid-19 cases and the relative strength of the Canadian dollar (CAD). Moreover, the economic rebound is currently driven solely by domestic consumption, while exports and corporate investment remain subdued.
In the short term, particular attention should be paid to any central bank efforts to influence the CAD exchange rate, primarily with a view to driving it down in relation to the USD, but this would invariably have consequences for the EUR/CAD pair too.
Very high levels of volatility were observed for the EUR/AUD pair in December, with a fluctuation range of close to 400 points. The Australian dollar (AUD) benefited from the continued increase in iron ore prices, one of Australia’s primary exports, and from the economic recovery in China, which is spreading to the land down under. It is worthy of note that China is Australia’s main trading partner, representing 39.4% of Australia’s exports and 17.6% of the country’s exported services.
However, many uncertainties remain for 2021, notably due to increasing political and commercial tensions observed between Australia and China, which may bear a negative impact on the AUD exchange rate. According to Capital Economics, Australian economic growth may contract by -2.8% in 2021 if Beijing decides to increase customs tariffs on a much larger number of Australian imports. Particular attention should be paid to the developments therein. We may well expect significant volatility on the AUD in the coming months.
A contained level of appreciation of the euro (EUR) vis-à-vis the offshore yuan (CNH) was observed in December. According to the latest data regarding the Chinese economy, the return to economic growth continues. This is mainly explained by public investment and the marked return of private investment, in particular in the telecoms, financial services and transport sectors.
However, growth gains are not yet driven by consumption in any significant way. This remains the main sticking point for China’s recovery. Given the seemingly durable risk appetite observed on the market at the start of this new year, the EUR/CNH pair’s slow, but progressive, appreciative trend will likely continue in the coming weeks and months.
Very strong appreciation of the EUR/HUF pair was observed during the month of December (+1.77%) in a rather volatile market for this particular currency pair, before some of these gains were ultimately eliminated at the beginning of the new year. Risk appetite is one of the main factors explaining recent trends for this pair. On the central bank front, the Hungarian central bank maintained its key interest rate unchanged, at 0.6%, and its overnight rate at -0.05%. Like several other central banks, it is seeking to ease its monetary policy further by moving towards a form of yield curve control in collaboration with the Hungarian ministry of finance.
In practical terms, the aim is to avoid an increase in interest rates in the short term, in order to allow the national government to continue to accumulate debt to support economic recovery. An increase in the country’s quantitative easing programme is likely this quarter, but it will most likely be a modest one. Over most of the year, Hungarian monetary policy should remain unchanged.
| DATE | CURRENCY | EVENT |
|---|---|---|
| 08/01 | USD |
US employment report for the month of December |
| 18/01 | CNH |
Publication of Chinese GDP for Q4 2020 |
| 20/01 | USD |
Inauguration of Joe Biden |
| 27/01 | USD |
Monetary policy meeting of the US Federal Reserve |
| Late January | EUR |
The European Parliament must vote on the Brexit agreement |