Chief Economist, Heteronomics

Phil Rush

Chief Economist

Heteronomics

Heteronomics represents a different kind of economics. We believe analysis should delve into the details of what is really going on, rather than using overly simplistic assumptions to quick-sell stories. Independence from myopic institutional pressures allows us to focus on the realities underlying your asset allocation decisions, without the conflicts of the old market structures. Heteronomics targets the themes driving UK asset prices, offering the benefits of depth, independence and ultimately price.

UK-centric macro research

Macroeconomics

<ul>
<li>UK retail sales failed to recover from the November lockdown. Stricter prohibitions on activity in January have caused spending on cards to collapse back to May levels, which will be especially bleak for retailers who never enjoyed a festive consumption binge.</li>
<li>Mobility metrics have also stepped down in the new year, and now indicate a GDP retreat to its June levels. I assume the same in my bottom-of-consensus forecast, where the trough is shallower but is likely to have a flatter recovery than the first lockdown.</li>
</ul>


UK retail sales failed to recover from the November lockdown. Stricter prohibitions on activity in January have caused spending on cards to collapse back to May levels, which will be especially bleak for retailers who never enjoyed a festive consumption binge.
Mobility metrics have also stepped down in the new year, and now indicate a GDP retreat to its June levels. I assume the same in my bottom-of-consensus forecast, where the trough is shallower but is likely to have a flatter recovery than the first lockdown.


Founder

Olivier Desbarres

Exacting. Excellent. Exceeding. Exemplary.

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

Media and analyst reports focussing on the scope for further US Dollar weakness and Emerging Market currency outperformance have continued to proliferate in the past month. The consensus view is still seemingly that a Democratic administration will fuel large US twin deficits and expectations of higher domestics inflation while Fed will keep rates on hold, eroding the value of Dollar assets. At the same time a pick-up in global confidence, economic growth and risk appetite will benefit EM and commodity currencies.While the “safe-haven” Dollar weakened sharply and EM currencies outperformed in the wake of the US elections on 3rd November recent facts tell a different story. Since 10th December the Dollar Nominal Effective Exchange Rate (NEER) and GDP-weighted baskets of developed and EM currencies have been broadly flat according to our calculations. Central European and Latin American currencies, which outperformed in November, have underperformed in past five weeks. Emerging Asian currencies, including the Chinese Renminbi, have done little since 10th December pointing to still active central bank FX management. This price action has broadly tallied with our near-term view that EM currencies will be “prone to sharp sell-offs (even if short-lived)”.Our analysis suggests that the steepness of the US Treasury yield curve rather than inter-country yield spreads matters more for the Dollar.However, we think central banks and sovereign wealth funds’ diversification out of Dollars into other reserve currencies, including Euro, Sterling, and Canadian, Australian and Kiwi Dollars, between May and early December was the main driver of Dollar depreciation.Dollar NEER’s stability since 10th despite a further 2.7% gain in the S&amp;P 500 suggests this diversification process has stalled, which we think is partly due to stretched valuations. At the same time price action points to a rotation out of the Euro into Sterling.We stick with our view that Dollar depreciation may not resume for another couple of months and will in any case not be as broad based as in November/early-December with markets paying greater attention to domestic factors, including valuations.

Media and analyst reports focussing on the scope for further US Dollar weakness and Emerging Market currency outperformance have continued to proliferate in the past month. The consensus view is still seemingly that a Democratic administration will fuel large US twin deficits and expectations of higher domestics inflation while Fed will keep rates on hold, eroding the value of Dollar assets. At the same time a pick-up in global confidence, economic growth and risk appetite will benefit EM and commodity currencies.While the “safe-haven” Dollar weakened sharply and EM currencies outperformed in the wake of the US elections on 3rd November recent facts tell a different story. Since 10th December the Dollar Nominal Effective Exchange Rate (NEER) and GDP-weighted baskets of developed and EM currencies have been broadly flat according to our calculations. Central European and Latin American currencies, which outperformed in November, have underperformed in past five weeks. Emerging Asian currencies, including the Chinese Renminbi, have done little since 10th December pointing to still active central bank FX management. This price action has broadly tallied with our near-term view that EM currencies will be “prone to sharp sell-offs (even if short-lived)”.Our analysis suggests that the steepness of the US Treasury yield curve rather than inter-country yield spreads matters more for the Dollar.However, we think central banks and sovereign wealth funds’ diversification out of Dollars into other reserve currencies, including Euro, Sterling, and Canadian, Australian and Kiwi Dollars, between May and early December was the main driver of Dollar depreciation.Dollar NEER’s stability since 10th despite a further 2.7% gain in the S&amp;P 500 suggests this diversification process has stalled, which we think is partly due to stretched valuations. At the same time price action points to a rotation out of the Euro into Sterling.We stick with our view that Dollar depreciation may not resume for another couple of months and will in any case not be as broad based as in November/early-December with markets paying greater attention to domestic factors, including valuations.

Dollar – Diversification, Rotation and Valuations

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?

<ul>
<li>The UK and EU negotiators have agreed a deal on their future trading relationship, broadly along the lines of the compromise we’ve expected for over a year. It should be approved by both parliaments, albeit with the European leg as a belated rubber stamp.</li>
<li>This deal remains a skinny one, focussed on goods, despite the fat legal text. Additional trade frictions are still likely to weigh on growth in 2021 and beyond, although such economic damage is small beer compared to the Covid-related catastrophe.</li>
</ul>


The UK and EU negotiators have agreed a deal on their future trading relationship, broadly along the lines of the compromise we’ve expected for over a year. It should be approved by both parliaments, albeit with the European leg as a belated rubber stamp.
This deal remains a skinny one, focussed on goods, despite the fat legal text. Additional trade frictions are still likely to weigh on growth in 2021 and beyond, although such economic damage is small beer compared to the Covid-related catastrophe.


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

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UK: No Sales Binge Between Prohibitions

UK retail sales failed to recover from the November lockdown. Mobility metrics now indicate a GDP retreat in Jan-21 to its June levels. I remain...

Phil Rush

Dollar – Diversification, Rotation and Valuations

Consensus view remains that USD will depreciate and EM currencies outperform. But that's not been the case in past 5 weeks as reserve...

Olivier Desbarres

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

Brexit: Yippee Ki Yay, Negotiators

The UK-EU negotiators agreed a skinny goods-focussed deal. Trade frictions are still set to weigh on growth in 2021 and beyond, although the damage...

Phil Rush

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

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