ECB Contact Group Market update
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CURRENCIES
ECB Contact Group Market update GLOBAL
CURRENCIES – November 2020
Richard Oliver Issuer of report: HSBC Bank plc
Head of EMEA FX Trading
HSBC Bank plc
richard.oliver@hsbcib.com Disclosures & Disclaimer: This report must be read with the
+44 20 7991 5082 disclosures and the analyst certifications in the Disclosure
appendix, and with the Disclaimer, which forms part of it
1. Topics of discussion in the FX market Source: Refinitiv Datastream, HSBC FX *We use a Machine Learning Process to extract key words in Reuters articles
2. Topics of discussion in the FX market excluding Election and Covid Related Themes. Source: Refinitiv Datastream, HSBC FX Research. *We use a Machine Learning Process to extract key words in Reuters articles. Our data range is from 1 January 2020 to 5 November 2020. We scanned nearly 21000 FX articles
3. The US election – now what?
Probability of Republican Senate control has shifted higher Lower volatility in financial markets should boost fund
flows into risky assets
100
Probability (%) 2.5
Cumulative flows (USD trn)
80 2.0
1.5
60 1.0
0.5
40 0.0
-0.5
20 -1.0
-1.5
0 -2.0
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20
President elect Biden Rep. Senate control Active Equity Funds Passive Equity Funds
Dem. Senate control Dem. Sweep Money Market Funds
Source: Bloomberg, Predictt, EFPR, HSBC4. Biden – policies and China
Clean sweeps usually see greater legislation passed but Implied tariffs on China and USD-CNY;
not always lower tariffs could boost the CNY
Percentage of legislation enacted by party
9% in the White House 7.60
Shaded areas
8% mark clean 7.40
7% sweep 7.20
6% 7.00
5% 6.80
4% 6.60
3% 6.40
2% 6.20
1% Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20
USD-CNY reference rate
0% USD-CNY spot
1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 Upper limit for USD-CNY spot
Carter Reagan Bush Snr. Clinton Bush Obama Trump Theoretical USD-CNY values (based only on tariffs)
Source: Predictit.org, Bloomberg, HSBC5. US-China tensions to persist
Number of China-related legislative proposals and resolutions introduced into US Congress
300 House Senate ytd by mid-Aug
250
200
150
100
50
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
…annualized from mid-August, 2020 China legislative proposal on track to rise
30% over 2019
Source: US Congress, HSBC6. The scarring from Covid & the recovery
Economic scarring set to be less evident in low debt countries and the US
2020 2021
110 110
GDP level, 2019 = 100
106 106
102 102
98 98
94 94
90 90
86 86
UK SP SA IT FR IN EZ JN BR GE CA US SW NZ AU NO CHF TU SK TA CH
Source: Bloomberg, HSBC7. The Demographic Investment Story
Global look at populations > 65 years A closer look at Europe
Sources: http://chartsbin.com/view/1239
https://en.wikipedia.org/wiki/Ageing_of_Europe8. The EUR is in focus too
ECB references to the exchange rate have been rising lately
Source: Bloomberg, HSBCChina & the RMB
9. China’s economic recovery is broadening
China’s recovery is broadening from production China’s import demand is also broadening from
to consumption tech-led to include other products
25% % y/y
30% China imports, % y/y, 3mma
20%
15%
20%
10%
5% 10%
0%
-5% 0%
-10%
-15% -10%
-20%
-25% -20%
08 09 10 11 12 13 14 15 16 17 18 19 20 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20
Credit impulse IP Retail sales Tech imports Other non-oil imports
Source: Bloomberg, HSBC Source: CEIC, HSBC10. RMB – a strong current account position
China’s trade surplus is very wide Strong exports to ‘G3’
250 USD bn USD bn
250
200 200
150 150
100 100
50
50
0
0
-50
-50 -100
-100 -150
07 08 09 10 11 12 13 14 15 16 17 18 19 20 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Oil and Gas Technology G3 China+HK Asia-ex-China
Non-oil, non-tech Trade balance
ROW Trade balance
Source for both charts: CEIC, HSBC11. RMB – More sensitive to portfolio flows
Foreigners’ bond investments have increased due in Net Stock Connect flows
part to index inclusion
30 Foreign bond inflows, USD bn 15 Stock Connect flows, Inflows to China
USD bn
10
25
5
20
0
15
-5
10 -10
5 -15
0 -20 Outflows from China
-5 -25
-10 -30
Jan-15 Mar-16 May-17 Jul-18 Sep-19 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20
Change in Bonds held by foreigners Northbound Southbound Net flows
Source for both charts: CEIC, HSBC12. Chinese corporates & hoarding USDs
Net FX settlement for goods trade purposes in China
USD bn
80
75% conversion ratio pre "trade war" 35% conversion ratio amid "trade war" 42% during
60 'Phase 1'
40
20
0
-20
-40
-60
Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20
Net FX sales by corps (trade conversion) Trade balance
Source: CEIC, HSBC13. History of the PBoC’s counter cyclical FX policy tools
Guiding the RMB without direct intervention
110 RMB appreciation 6.1
Jan 2018 first cut
108 RMB depreciation of CCF to neutral 6.2
Sept 2017 6.3
106 first cut of
reserve ratio 6.4
104
to zero August 2018 re- 6.5
102 application of reserve Oct 2020 cut
May 2017 first 6.6
charge + CCF reserve ratio to
100 introduction of CCF 6.7
zero again
Sept 2015 6.8
98 first
introduction 6.9
96
of reserve 7.0
94 charge 7.1
92 7.2
90 7.3
Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20
CFETS RMB Index USD-CNY fix USD-CNY spot (RHS, reverse scale)
Source: Bloomberg, HSBC14. History of CNH and onshore CNY FX points and effective cost of 20%
reserve charge
Reserve charge is adjusted according to FX flow condition
4000 500
pip pip
3000 400
2000 300
1000 200
0 100
-1000 0
Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20
USD-CNH 12m forward points USD-CNY 12m forward points Forex reserve charge (RHS)
Source: Bloomberg, HSBC *Note: The red line represents, for example, the additional cost of buying the one-year USD forward onshore with the 20% reserve charge; for instance, the
additional cost on 1y RHS outright forward is currently around 50pip (20%*35*6.70), assuming 1y US libor at 35bp.Asia FX liquidity
15. Top-of-book spreads during Asia hours
USDCNH USDHKD USDSGD USDTHB
5 5
Weekly median primary* top-of-book spreads during Asia hours
4 4
Spread (bps)
3 3
2 2
1 1
0 0
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20
Source: HSBC,
* EBS for USDCNH and Reuters for USDHKD, USDSGD and USDTHB16. Traded volume
USDCNH USDHKD USDTHB USDSGD
70,000 70,000
Weekly total traded volume* (millions of USD) during
60,000 Asian Hours 60,000
50,000 50,000
40,000 40,000
30,000 30,000
20,000 20,000
10,000 10,000
0 0
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20
Source: HSBC
*On EBS, Reuters, Hotspot, Currenex, LMAX, ParFX, Gain GTX and FXall17. Intraday traded FX volume
USDCNH USDHKD USDSGD USDTHB
2,500 2500
Average intraday traded volume* profiles between 2020.01.06 and 2020.11.06
2,000 2000
Volume ($M)
1,500 1500
1,000 1000
500 500
0 0
10:00
11:00
12:00
13:00
14:00
15:00
16:00
17:00
18:00
19:00
20:00
21:00
22:00
23:00
0:00
1:00
2:00
3:00
4:00
5:00
6:00
7:00
8:00
9:00
Source:
*On EBS, Reuters, Hotspot, Currenex, LMAX, ParFX, Gain GTX and FXallDISCLAIMER
The information contained in this material is intended for the sole use of the recipient and is not for general distribution. The author is a member of the sales and trading department
and not of the research department of HSBC Bank plc and/or HSBC UK Bank plc. The sales and trading department of HSBC Bank plc and/or HSBC UK Bank plc is engaged in
selling and trading in securities to which this material relates or is relevant. Accordingly, recipients of this should not regard it as an objective or independent explanation of the
matters contained in it. This has not been prepared in accordance with regulatory requirements designed to promote the independence of investment research. Any information
contained in this is not and should not be regarded as investment research for the purposes of the rules of the FCA. Any recommendations in this material are based on the individual
opinions of the sender and may be changed at any time without notice. Opinions expressed may differ from the opinions expressed by other divisions of HSBC Bank plc and/or HSBC
UK Bank plc, including its research department.
HSBC Bank plc
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