Happy New Year – A time of renewal, a time of new thinking and a time of excitement for change as we look to the future (even in the time of COVID).
We like to use the New Year to ‘review’ and see if we need to ‘renew’ or ‘rethink’ our FX strategy, which is what we shall do for this week’ piece.
What’s changed from 2020 to 2021?
· New administration in Washington
· Brexit is finally complete
· US rates have shifted
· Unconventional policy the world over
· Geo-political tensions – particularly in the Pacific
We will be watching for reactions to these points from both the fiscal and monetary sides of policy this year but what this means for FX based on the current setting is:
USD: New administration will mean increased US fiscal stimulus; this had triggered bearishness in the currency for most of 2020, but what will happen as it becomes a real event in 2021? It probably risks creating a US ‘exception’ narrative and may lead to a rise in market discussions of the Fed tapering. Either way the USD is near ‘rock-bottom’ pricing and in the short term a snap back may be seen.
EUR: Real yields and equity sentiment remain the key drivers of the EUR, ECB remains sidelined and fiscal support is piecemeal and country specific. Over 2021 it’s likely to rise naturally.
GBP: Brexit is over and the oversold GBP had snapped back with gusto to end 2020. However, post-Brexit reality is COVID, which could cause a probable double-dip recession and a likely BoE rate cut in Feb. Bearish here.
JPY: It remains a solid defensive play. USD/JPY had weakened due to the USD’s slide, however if as expected the USD finds support, the pair will struggle to fall further, much to the relief of the BoJ.
AUD: RBA is out of ammo in the medium term and Asia’s thrust for copper and iron ore is driving the AUD hard. However, AUD/USD is vulnerable to a short-term pullback on a pausing USD and profit taking – medium-term outlook is bullish and short-term outlook is bearish.
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