HSBC Look to Buy the Euro against Pound Sterling, say Recent Dollar Weakness Justified
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Foreign exchange strategists at HSBC are looking for a recent decline in the value of the British Pound against the Euro to accelerate and they have recommended buying EUR/GBP as a result.
In a strategy briefing note to clients HSBC say they also expect the recent weakness in the U.S. Dollar to continue into the foreseeable future as 'risk on' considerations dominate financial markets, meanwhile the safe-haven Japanese Yen and Swiss Franc are said to be vulnerable to weakness.
The justification for the call to buy the Euro and sell the Pound is build on the view that the vaccination rate advantage the UK held over the EU is now diminishing, which could allow confidence towards the Eurozone economy to grow.
"The topic of COVID-19 vaccination roll-out has been prominent in EURGBP’s decline during Q1 21. We believe this dynamic is now going into reverse, with EU supply set to accelerate and the gap between the UK and EU of the percentage vaccinated set to close," says Daragh Maher, Head of U.S. FX Strategy at HSBC.
The UK currently sits on a daily run-rate of 437K vaccinations a day, but the growing need for second doses means the number of first doses sits in the 90K-130K region, a substantial declines from the March peaks of around 500K+.
The EU on the other hand has seen vaccination rates accelerate notably this April as supplies increase.
Germany vaccinated nearly 740k people, a daily record on Wednesday lasr week while Belgium vaccinated more than 550k in the previous week, also a new record.
France is meanwhile consistently hitting more than 450K vaccinations per day.
"This shift should allow the EUR to more fully capitalise on the mostly impressive economic data. Our newly introduced proprietary data on FX flows from the speculative investor community shows the EUR-USD selling and GBP-USD buying of Q1 has lost momentum," says Maher.
HSBC open a trade idea to buy EUR/GBP, targeting 0.8888. This gives a Pound-to-Euro exchange rate target of 1.1250.
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Elsewhere, the Dollar has also been an underperformer in global FX in April and HSBC say that while they have some sympathy for a growing USD bull theme amongst investors, they "just think it is a little premature".
They expect 'risk on / risk off' to be a key driver of currency markets over coming weeks, and this will likely be to the detriment of the traditional safe-haven names such as the Dollar, Yen and Franc.
"Recent USD weakness in response to upside US data surprises hint at a renewed surge in risk appetite rather than US exceptionalism as the USD determinant. We suspect this is a function of the Fed’s patient stance on policy which is allowing the US upswing to continue un-checked. It points to additional selling of the USD safe haven for now," says Maher.
He says 'risk on / risk off' dynamics also leaves the safe-haven Yen and Swiss franc vulnerable.
"For the CHF, we were bemused by its recent strength and are reassured to see it reverse. We continue to target a move higher in EUR-CHF to 1.1350. For USD-JPY, this remains more about Treasury yields than it does about Japanese economic dynamics," says Maher.
HSBC's positioning indicators suggest the market is also short on the Japanese Yen and they suspect it will take a notable move higher in U.S. yields to support a sustained move in USD/JPY above 110.
Meanwhile, growing risk appetite should naturally favour "risk on" G10 FX, but there are still some relative opportunities within this cohort.
"We expect the NOK and CAD to outperform both the AUD and NZD, although all currencies are expected to gain versus the USD," says Maher.
