New Year is expected to be much better than the previous one. Admittedly 2020 set the bar very low but economies will still face tough hurdles in Q1 of 2021 due to the ongoing lockdowns.
We base our expectations on a premise of successful reflation, output growth, spending stimulation and reversal of the deflation pressures. Economies have undertaken a combination of QE programs, fiscal stimulus and low interest rates in order to create growth based on sustainable inflationary environment. Additionally, vaccine rollout and positive effects from it will be very important to confirm our views.
President-elect Biden should peacefully take over the presidency in January. His milder temperament combined with many years of experience in politics will lead to improvement in relationships with EU. He appointed former Fed Chairman Janet Yellen as new Treasury Secretary. She is a big proponent of free trade and fiscal stimulus, all positive for the markets. Fed announced that they are not planning on raising rates until 2023, possibly 2024 and with Yellen at Treasury they can afford to stick to the current monetary policy and expect support from the fiscal side. Runoff for 2 Senate seats in Georgia on January 5 will influence the size of the stimulus.
We expect that USA will be at the forefront of the reflation recovery. It will lead to widening of spread between yields on 10y treasuries compared to 10y bunds (German bonds) as USA pulls global recovery. Due to the expected rise in inflation we will see yields on treasuries rise as 10y treasuries reach 1% and move toward 1.25%. Increase in inflation will lead to negative real interest rates forcing investors out of the treasuries, thus lowering demand for them and USD in general. All of this will accentuate USD decline as investors search for return elsewhere, possibly in the emerging markets.
Q1 will be rough due to the lockdown measures, however as the vaccine rollout picks up and life starts returning to normal condition we can see a recovery starting in Q2 and booming in H2 of 2021 due to the pent up demand.
Governments have fought the virus induced crisis with fiscal programs and easing of monetary policies thus increasing debt to GDP ratio over 100% in many large economies. Trade volumes are expected to rebound which will positively impact export oriented countries such as Germany and Netherlands. Due to the prolonging of lockdown restrictions in those countries into the January of 2021 Eurozone Q1 GDP will be impaired with rebound starting from Q2. EURUSD will breach the 1.25 level, with potential to shoot close to the 1.30 level. ECB will have no means of bringing it down. The rise will be achieved on the back of USD weakness, not EUR strength.
Virus has wrecked havoc in the UK economy, so the economy will benefit greatl from the Brexit deal. There will most likely be a soft deal which will be positive for future relationship with EU, with EURGBP dropping toward the 0.88 level. We could see GBPUSD hovering over the 1.40 level with pressures to the upside based on the general USD weakness. If the UK leaves without a deal and reverts to WTO rules it will leave the country isolated from both EU and US and give wind to the sails of the Scottish independence claim in 2021, after the Scottish Parliamentary elections. EURGBP could rise toward the 0.95 level.
Chinese authorities announced a move toward achieving a high quality growth in their fourteenth five year plan. Technology war will be the biggest threat in 2021 as many countries apart from US become reluctant to use Chinese technology which will have negative impact on CNY. On the other hand, China GDP growth should be at around 7% due to the weak GDP base in 2020 which will positively impact CNY. Improved trade relationships between US and China, although lifting of all the previously implemented tariffs will not likely happen soon as well as the fact that monetary policy is not likely to continue with easing will add positives for CNY. USDCNY should fall toward the 6.20 level as we get closer to the end of 2021.
Negative real yields in USD could push USDJPY toward the 100 level, with potential to break it and put the pair into double digits. Our expectations are for USDJPY to hover at around 102 throughout the year.
SNB has been labeled currency manipulator, but at their December meeting board members did not seem concerned with that and reiterated their willingness to continue fighting Swissy’s strength in order to support the economy. Combination of global reflation trade and CHF unwinding should push EURCHF over the 1.10 level with potential of reaching the 1.15 level by the year end.
Reflaitonary policies will help commodity prices rise and in turn lead to the appreciation of the so-called “commodity currencies”. Bounce back in oil prices toward the $60 level by the end of the year and low chance for further monetary easing should push USDCAD down to the 1.24 level.
With 40% of exports going to China, most of it being the iron ore, AUD will be sensitive to Australia – China trade tensions as well as potential drop in iron ore prices. If US-China relationship improves we can see the tensions ease between Australia and China which will positively affect AUD. Demand from China for iron ore seems to be waning, leading to lower iron ore prices and consequently lower profits from export for Australia, negative for AUD. We see no further monetary easing from RBA and global reflation trade should push AUDUSD toward the 0.80 by the year end
We do not see RBNZ pushing for negative interest rates and if they desire to fight strong NZD they will most likely use QE with yield curve control as the second measure. With RBNZ introducing housing prices in their mandate we expect NZDUSD to push toward the 0.75 level by the year end.
TradersWay team wishes you Merry Christmas and a Happy New Year.
