Founder

Olivier Desbarres

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4X Global Research

4X Global Research was founded in 2017 to provide institutional and corporate clients with the substantive research, high-quality analysis and thoughtful insight on Emerging and G20 economies and financial markets they need to make informed and timely decisions and gain an edge in their investments.

FX & Rates

This report updates the monthly seasonal patterns of 31 major Nominal Effective Exchange Rates(NEERs) going back to January 2010, using over two million daily data points with trade-weights derived from the<a href="https://www.bis.org/statistics/eer.htm" target="_blank" rel="noopener"> BIS</a> (April 2019) and national central banks (see <a href="https://gallery.mailchimp.com/948838a86ce72ab6d8019a39d/files/15f4d8a9-56a4-46fd-9d78-607e5fd523e6/4X_Global_Research_Nominal_Effective_Exchange_Rates_Monthly_seasonal_patterns.pdf" target="_blank" rel="noopener">Nominal Effective Exchange Rates: Monthly seasonal patterns</a>, 10 January 2019). A number of factors can drive currency seasonality, including underlying seasonal patterns in balance of payment flows, the timing of public holidays and market liquidity. However, significant changes in central bank or government policy, major domestic events (e.g. Brexit) and once-in-a-lifetime “black swan” events such as the Covid-19 pandemic January can break down even well established seasonal currency patterns. In emerging Asia interventionist central banks have in part eroded monthly currency seasonality.Unsurprisingly, typical monthly seasonal currency patterns broke down in 2020, with a few exceptions. In particular, when global risk sentiment collapsed in March and peaked in June only a handful of currencies moved broadly in line with their historical patterns. Historical seasonal patterns somewhat re-established themselves in Q3 (notably August) with domestic factors once again driving asset prices, including currencies. But the resurgence in Covid-19 cases and deaths in Q4 along with the re-imposition of national lockdowns once again contributed to a breakdown in historical seasonal patterns, albeit not as marked as in March or June.The Brazilian Real and Colombian Peso NEERs recorded the strongest average rates of appreciation in the month of January in 2010-2019, while the Turkish Lira and Russian Rouble were the weakest. About 15 NEERs traded broadly in line with their historical patterns in January 2020.However, the Covid-19 pandemic was still in its infancy and its impact on global economies and financial markets still modest. The risk is that many currencies, including the typically strong Swiss Franc, may in January 2021 continue to deviate materially from their 2010-2019 seasonal patterns in our view.

This report updates the monthly seasonal patterns of 31 major Nominal Effective Exchange Rates(NEERs) going back to January 2010, using over two million daily data points with trade-weights derived from the BIS (April 2019) and national central banks (see Nominal Effective Exchange Rates: Monthly seasonal patterns, 10 January 2019). A number of factors can drive currency seasonality, including underlying seasonal patterns in balance of payment flows, the timing of public holidays and market liquidity. However, significant changes in central bank or government policy, major domestic events (e.g. Brexit) and once-in-a-lifetime “black swan” events such as the Covid-19 pandemic January can break down even well established seasonal currency patterns. In emerging Asia interventionist central banks have in part eroded monthly currency seasonality.Unsurprisingly, typical monthly seasonal currency patterns broke down in 2020, with a few exceptions. In particular, when global risk sentiment collapsed in March and peaked in June only a handful of currencies moved broadly in line with their historical patterns. Historical seasonal patterns somewhat re-established themselves in Q3 (notably August) with domestic factors once again driving asset prices, including currencies. But the resurgence in Covid-19 cases and deaths in Q4 along with the re-imposition of national lockdowns once again contributed to a breakdown in historical seasonal patterns, albeit not as marked as in March or June.The Brazilian Real and Colombian Peso NEERs recorded the strongest average rates of appreciation in the month of January in 2010-2019, while the Turkish Lira and Russian Rouble were the weakest. About 15 NEERs traded broadly in line with their historical patterns in January 2020.However, the Covid-19 pandemic was still in its infancy and its impact on global economies and financial markets still modest. The risk is that many currencies, including the typically strong Swiss Franc, may in January 2021 continue to deviate materially from their 2010-2019 seasonal patterns in our view.

Monthly Currency Seasonality: Down and Out?

We concluded in <a href="https://www.smartkarma.com/insights/far-more-to-renminbi-than-usd-cny-cross" target="_blank" rel="noopener">Far more to Renminbi than USD/CNY cross</a> (8th December 2020) that the risk was tilted towards the People’s Bank of China further weakening the Renminbi Nominal Effective Exchange Rate (NEER) in coming weeks given deflationary pressures. So far we have been proven broadly right, with the NEER down about 0.2% in the past fortnight while the month-on-month rate of depreciation has accelerated to around 1.1%. The consensus forecast in recent weeks has seemingly been that Emerging Market (EM) currencies would outperform both the Dollar and developed market currencies. This held broadly true in the first half of December, although emerging Asian currencies underperformed in line with our forecast that more interventionist central banks would cap currency gains (see <a href="https://www.smartkarma.com/insights/emerging-market-currencies-hopes-and-realities" target="_blank" rel="noopener">Emerging Market currencies: Hopes and Realities</a>, 2nd December 2020). Moreover, global risk appetite has soured in recent days in the face of a rise in Covid-19 cases and deaths and (re)introduction of national lockdowns, particularly in Europe. EM currencies, particularly in Latin America and Central Europe, have weakened sharply (and underperformed) against a resurgent Dollar. We had warned that “some EM currencies were already pricing in a lot of “good” news” and would be “prone to sharp sell-offs”. We are sticking to our view that there is “greater scope for more rapid Dollar depreciation and EM currency outperformance beyond February” but the risk is clearly that this timeline will slip to March or April.Global GDP growth surged a record 8.2% qoq in Q3 after having contracted 7.4% in Q2, according to our estimate. Nevertheless, world GDP was still 2.8% lower than at end-2019 and 4.5% weaker than it would have been had growth continued to trend at about 0.6% qoq. Moreover, as already noted in <a href="https://www.smartkarma.com/insights/global-growth-collapse-recovery-slowdown-repeat" target="_blank" rel="noopener">Global growth: Collapse, Recovery, Slowdown…repeat?</a> (24th September 2020), momentum in global GDP has been slowing sharply since its May-June peak. Our core scenario of tighter lockdown measures curtailing economic activity in Q4 has sadly materialised and we stick to our forecast that “global GDP growth will slow in Q4, potentially quite sharply, and not just because of less favourable base-effects”.

We concluded in Far more to Renminbi than USD/CNY cross (8th December 2020) that the risk was tilted towards the People’s Bank of China further weakening the Renminbi Nominal Effective Exchange Rate (NEER) in coming weeks given deflationary pressures. So far we have been proven broadly right, with the NEER down about 0.2% in the past fortnight while the month-on-month rate of depreciation has accelerated to around 1.1%. The consensus forecast in recent weeks has seemingly been that Emerging Market (EM) currencies would outperform both the Dollar and developed market currencies. This held broadly true in the first half of December, although emerging Asian currencies underperformed in line with our forecast that more interventionist central banks would cap currency gains (see Emerging Market currencies: Hopes and Realities, 2nd December 2020). Moreover, global risk appetite has soured in recent days in the face of a rise in Covid-19 cases and deaths and (re)introduction of national lockdowns, particularly in Europe. EM currencies, particularly in Latin America and Central Europe, have weakened sharply (and underperformed) against a resurgent Dollar. We had warned that “some EM currencies were already pricing in a lot of “good” news” and would be “prone to sharp sell-offs”. We are sticking to our view that there is “greater scope for more rapid Dollar depreciation and EM currency outperformance beyond February” but the risk is clearly that this timeline will slip to March or April.Global GDP growth surged a record 8.2% qoq in Q3 after having contracted 7.4% in Q2, according to our estimate. Nevertheless, world GDP was still 2.8% lower than at end-2019 and 4.5% weaker than it would have been had growth continued to trend at about 0.6% qoq. Moreover, as already noted in Global growth: Collapse, Recovery, Slowdown…repeat? (24th September 2020), momentum in global GDP has been slowing sharply since its May-June peak. Our core scenario of tighter lockdown measures curtailing economic activity in Q4 has sadly materialised and we stick to our forecast that “global GDP growth will slow in Q4, potentially quite sharply, and not just because of less favourable base-effects”.

Forecast Review: USD, CNY, EM & Global Growth

Sterling underperformed in September, in line with our bearish forecast (<a href="https://www.smartkarma.com/insights/uk-sterling-facing-potential-quadruple-whammy" target="_blank" rel="noopener">UK &amp; Sterling facing potential quadruple whammy</a>, 4th September 2020). It gradually recovered from 22nd September, appreciated throughout October and peaked on 27th November.Sterling NEER has since weakened about 2.4% to an 11-week low. The sell-off at the turn of December was exacerbated by all four of the United Kingdom’s devolved nations still being subject to tight social distancing restrictions and their negative impact on the UK economy. In the past ten days the dwindling odds of the United Kingdom and European Union signing a free trade deal before 31st December have driven Sterling’s sharp fall – a risk we flagged over three months ago.About 90% of a draft treaty has been nailed down but many clauses are still subject to a broader agreement and negotiators are still at loggerheads on a number of key issues, including the EU’s fishing rights in UK waters, “level playing fields” and the role of the ECJ.Senior officials met on 9th December in a last-ditch attempt to reach agreement but little or no progress was made. Both sides have agreed that a deal needs to be reached by Sunday 13th December. This is now a “hard” rather than “soft” deadline, in our view. Both sides have warned in the past 48 hours that agreement on a new trade deal by Sunday is unlikely and the EU has published contingency measures in the event of a no-deal.A “hard” Brexit would have a material negative impact on the UK economy in the short-term, according to our analysis, and we would expect Sterling to weaken further, particularly as net short speculative positions are still modest.We still think a free-trade deal (“soft” Brexit) will be reached but our degree of confidence has sharply eroded in recent weeks. A Sterling rally could still be hostage to “devils in the detail” of such a deal and to the weak near-term outlook for an economy on the back-foot.Finally, while mass vaccination is a game-changer medium-term it not does not preclude a further tightening of UK social distancing measures in coming weeks, in our view.

Sterling underperformed in September, in line with our bearish forecast (UK &amp; Sterling facing potential quadruple whammy, 4th September 2020). It gradually recovered from 22nd September, appreciated throughout October and peaked on 27th November.Sterling NEER has since weakened about 2.4% to an 11-week low. The sell-off at the turn of December was exacerbated by all four of the United Kingdom’s devolved nations still being subject to tight social distancing restrictions and their negative impact on the UK economy. In the past ten days the dwindling odds of the United Kingdom and European Union signing a free trade deal before 31st December have driven Sterling’s sharp fall – a risk we flagged over three months ago.About 90% of a draft treaty has been nailed down but many clauses are still subject to a broader agreement and negotiators are still at loggerheads on a number of key issues, including the EU’s fishing rights in UK waters, “level playing fields” and the role of the ECJ.Senior officials met on 9th December in a last-ditch attempt to reach agreement but little or no progress was made. Both sides have agreed that a deal needs to be reached by Sunday 13th December. This is now a “hard” rather than “soft” deadline, in our view. Both sides have warned in the past 48 hours that agreement on a new trade deal by Sunday is unlikely and the EU has published contingency measures in the event of a no-deal.A “hard” Brexit would have a material negative impact on the UK economy in the short-term, according to our analysis, and we would expect Sterling to weaken further, particularly as net short speculative positions are still modest.We still think a free-trade deal (“soft” Brexit) will be reached but our degree of confidence has sharply eroded in recent weeks. A Sterling rally could still be hostage to “devils in the detail” of such a deal and to the weak near-term outlook for an economy on the back-foot.Finally, while mass vaccination is a game-changer medium-term it not does not preclude a further tightening of UK social distancing measures in coming weeks, in our view.

The prevailing market view, as depicted in a recent <a href="https://uk.investing.com/news/economic-indicators/exclusive-china-comfortable-with-yuan-rises-for-now-as-economy-recovers-sources-say-2261648" target="_blank" rel="noopener">Reuters</a> article, is seemingly that Chinese policy makers are happy to allow further Renminbi appreciation versus the Dollar driven by a rising domestic trade surplus and strong capital account inflows.The Renminbi has indeed appreciated 2.2% versus the Dollar since our last report on 22nd October <a href="https://www.smartkarma.com/insights/pboc-likely-to-keep-renminbi-on-tight-leash" target="_blank" rel="noopener">(PBoC likely to keep Renminbi on tight leash</a>), with the USD/CNY cross currently trading near its lowest level since mid-2018. However, the US accounts for only about 20% of Chinese trade in goods. The Renminbi Nominal Effective Exchange Rate is thus a far more accurate measure of overall Chinese export competitiveness and of the currency’s potential (dis)inflationary impact.The Renminbi NEER slowly appreciated further in the run-up to the US elections on 3rd November but has since then depreciated about 0.9%, with the Renminbi underperforming many major currencies including the Euro and Korean Won. The Renminbi NEER is currently trading at the same level as it was on 22nd October, in line with our forecast that “near-term the PBoC is more likely in a first instance to slow the pace of Renminbi appreciation and ultimately arrest the currency’s climb”. The Renminbi has weakened recently despite evidence of strong balance of payments inflows, including a record trade surplus of $74.4bn in November and a 11.8% yoy increase in FDI inflows, and data pointing to seasonal Renminbi strength in the month of November.Price action in the past seven weeks suggests to us that the People’s Bank of China has been fixing the daily USD/CNY central parity rate slightly higher than implied by underlying market forces, allowing modest Renminbi NEER depreciation mainly to put a floor under Chinese consumer prices flirting with deflation (a view we expressed on 22nd October). Near-term we expect the Renminbi to continue appreciating versus a slowly depreciating Dollar (<a href="https://www.smartkarma.com/insights/emerging-market-currencies-hopes-and-realities" target="_blank" rel="noopener">Emerging Market currencies: Hopes and Realities</a>, 2nd December 2020). However, we think the risk is tilted towards the PBoC further weakening the Renminbi NEER in coming weeks to the levels which prevailed in early September.

The prevailing market view, as depicted in a recent Reuters article, is seemingly that Chinese policy makers are happy to allow further Renminbi appreciation versus the Dollar driven by a rising domestic trade surplus and strong capital account inflows.The Renminbi has indeed appreciated 2.2% versus the Dollar since our last report on 22nd October (PBoC likely to keep Renminbi on tight leash), with the USD/CNY cross currently trading near its lowest level since mid-2018. However, the US accounts for only about 20% of Chinese trade in goods. The Renminbi Nominal Effective Exchange Rate is thus a far more accurate measure of overall Chinese export competitiveness and of the currency’s potential (dis)inflationary impact.The Renminbi NEER slowly appreciated further in the run-up to the US elections on 3rd November but has since then depreciated about 0.9%, with the Renminbi underperforming many major currencies including the Euro and Korean Won. The Renminbi NEER is currently trading at the same level as it was on 22nd October, in line with our forecast that “near-term the PBoC is more likely in a first instance to slow the pace of Renminbi appreciation and ultimately arrest the currency’s climb”. The Renminbi has weakened recently despite evidence of strong balance of payments inflows, including a record trade surplus of $74.4bn in November and a 11.8% yoy increase in FDI inflows, and data pointing to seasonal Renminbi strength in the month of November.Price action in the past seven weeks suggests to us that the People’s Bank of China has been fixing the daily USD/CNY central parity rate slightly higher than implied by underlying market forces, allowing modest Renminbi NEER depreciation mainly to put a floor under Chinese consumer prices flirting with deflation (a view we expressed on 22nd October). Near-term we expect the Renminbi to continue appreciating versus a slowly depreciating Dollar (Emerging Market currencies: Hopes and Realities, 2nd December 2020). However, we think the risk is tilted towards the PBoC further weakening the Renminbi NEER in coming weeks to the levels which prevailed in early September. 

Media coverage of Emerging Market currencies tends to oscillate between the very bearish and very bullish, with little differentiation between low and high-yielding currencies or between regional blocks let alone between the dozens of currencies still referred to, rightly or wrongly, as “emerging”. Price action in 2019 only partially vindicates this approach.News articles about the November EM currency rally and the long list of factors supporting further outperformance next year have been rife.EM currencies, particularly high-yielders, materially outperformed in the fortnight following the US elections thanks in part to a pick-up in portfolio inflows. The prevailing view was/is that a less conflictual Biden presidency will be a net positive for global trade and commodity prices. EM currencies appreciated further following news on 23rd November that the more affordable Astra Zeneca vaccine was up to 90% effective and Trump’s announcement that he would allow the transition of power to President-elect Biden.However, in the past two weeks a GDP-weighted basket of EM currencies (excluding the Chinese Renminbi) has appreciated only 0.9% versus the Dollar and underperformed a basket of developed market currencies (+1.3%). Moreover, high yielding EM currencies (+1.1%) have only marginally outperformed low-yielding EM currencies (+0.7%). Domestic and regional factors over-and-above “global risk appetite” have arguably contributed to the outperformance of Central European and Latam currencies and the more mixed (read subdued) performance of high-yielding EM and Asian currencies. One explanation is that some of these EM currencies are already pricing in a lot of “good” news.The consensus forecast is seemingly that EM currencies will outperform both the Dollar and developed market currencies going forward. The long list of supporting factors includes i) cheap EM valuations, ii) EM currencies’ yield advantage, iii) the benefits to EM of further Dollar depreciation and iv) a rebound in global economic growth. We sympathise with this view, albeit with some important caveats. One is that more interventionist Asian central banks may stop their currencies from fully joining any EM currency party in 2021. Moreover, we would split the next 13 months into three timelines.

Media coverage of Emerging Market currencies tends to oscillate between the very bearish and very bullish, with little differentiation between low and high-yielding currencies or between regional blocks let alone between the dozens of currencies still referred to, rightly or wrongly, as “emerging”. Price action in 2019 only partially vindicates this approach.News articles about the November EM currency rally and the long list of factors supporting further outperformance next year have been rife.EM currencies, particularly high-yielders, materially outperformed in the fortnight following the US elections thanks in part to a pick-up in portfolio inflows. The prevailing view was/is that a less conflictual Biden presidency will be a net positive for global trade and commodity prices. EM currencies appreciated further following news on 23rd November that the more affordable Astra Zeneca vaccine was up to 90% effective and Trump’s announcement that he would allow the transition of power to President-elect Biden.However, in the past two weeks a GDP-weighted basket of EM currencies (excluding the Chinese Renminbi) has appreciated only 0.9% versus the Dollar and underperformed a basket of developed market currencies (+1.3%). Moreover, high yielding EM currencies (+1.1%) have only marginally outperformed low-yielding EM currencies (+0.7%). Domestic and regional factors over-and-above “global risk appetite” have arguably contributed to the outperformance of Central European and Latam currencies and the more mixed (read subdued) performance of high-yielding EM and Asian currencies. One explanation is that some of these EM currencies are already pricing in a lot of “good” news.The consensus forecast is seemingly that EM currencies will outperform both the Dollar and developed market currencies going forward. The long list of supporting factors includes i) cheap EM valuations, ii) EM currencies’ yield advantage, iii) the benefits to EM of further Dollar depreciation and iv) a rebound in global economic growth. We sympathise with this view, albeit with some important caveats. One is that more interventionist Asian central banks may stop their currencies from fully joining any EM currency party in 2021. Moreover, we would split the next 13 months into three timelines.

Emerging Market Currencies: Hopes and Realities

United States

The euro is the official currency of the European Economic & Monetary Union.  The US dollar is the official currency of the United States of America.

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EURO/US DOLLAR (EURUSD CURNCY)

Monthly Currency Seasonality: Down and Out?

Covid-19 pandemic and national lockdowns in 2020 wreaked havoc with historical monthly seasonal patterns for developed and EM currencies. But what...

Olivier Desbarres

Forecast Review: USD, CNY, EM & Global Growth

Our forecasts of Chinese Renminbi depreciation, emerging market currency outperformance punctuated by sharp sell-offs and a rapid slowdown in...

Olivier Desbarres

Sunday Bloody Sunday

GBP under pressure as risk of hard Brexit mounts. Sunday "hard" deadline for UK and EU to reach deal (still our core scenario). UK economic outlook...

Olivier Desbarres

Far More to Renminbi than USD/CNY Cross

CNY has appreciated further vs USD since US elections but weakened in NEER terms despite strong BoP inflows into China. PBoC has fixed USD/CNY to...

Olivier Desbarres

Emerging Market Currencies: Hopes and Realities

EM currencies appreciated vs USD and outperformed in fortnight following US elections but since then performance more differentiated. Consensus is...

Olivier Desbarres

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