News & analysis

As the dust from the US election clears and the outline of Joe Biden’s presidency becomes clear, we take the opportunity to update our FX forecast to reflect this dissipation of risk. Our forecasts also reflect new information, notably the positive vaccine news and not-so-positive developments in virus case counts across many major economies. Our October FX forecasts were based on the assumptions that a winner for the US election would be confirmed without a major constitutional crisis, and that improving treatment and vaccination for Covid-19 would make for an accelerating global economic recovery in 2021.

With the Federal Reserve now fully committed to a significantly more dovish reaction function, our view remains that these conditions are likely to lead to further broad dollar weakness.

On the whole, these assumptions have held up, and many of our longer-term forecasts remain broadly unchanged in their anticipation of dollar weakness. This view is a consensus among sell-side analysts, although our own calls for dollar weakness in 2021 are more conservative than many, particularly against other G10 economies with dovish central banks and severe domestic Covid-19 situations.

However, our base case for the US election was a faster win for Joe Biden and a democrat majority in the Senate, leading to a modest relief rally in the Senate. With the outcome of the Senate race in particular still dependent on Georgia runoff elections in January, the dollar has remained on the back foot. Our near-term forecasts generally no longer envisage any type of relief rally for the dollar in the near term. Looking ahead, the biggest risks to our forecasts in the near term stem from delayed implementation of Covid-19 vaccination and worse-than-expected economic effects from the second peak of infections currently being experiences in the US and Europe. In the longer-run, it remains too early to judge any prospective policy normalization, but we note that activist fiscal policy will likely make the 2021 recovery much faster – and potentially more inflationary – than the one following the 2009 global recession.


Our 2020 year-end view on EURUSD has been revised upwards on the back of diminishing US political risks and our expectations of a firm USD downtrend. In the short-term, the euro is yet to show the signs of the recent surge in coronavirus cases as vaccine optimism and sustained monetary policy support continues to offset the downside risk in the currency outlook. EURUSD´s resistance to break the 1.20 level in the short-term is underpinned by a weaker growth differential and broad uncertainty about vaccine developments, i.e. which ones will gain approval and how they will effectively be distributed across the euro area. In 2021, once these risks clear, we expect the euro to benefit from a front-loaded rally as treatments prove effective in allowing the economy to re-open and economic outlooks to rapidly improve.


The loonie’s inability to find a firm footing to break the 1.30 barrier has resulted in us maintaining a flat view on USDCAD until year-end. A deteriorating short-term outlook stemming from second wave lockdowns may result in the Bank of Canada returning to verbally weaken the loonie in the short-term, similar to what occurred back in Q1 and as recently as October’s policy decision. In the New Year, however, we believe the Canadian dollar is well positioned to benefit from a renewed appetite for risk and a firm domestic economic recovery.

A high savings rate, active fiscal stimulus and high vaccination orders means Canada’s recovery may lead other G10 economies.


Given the pro-cyclicality of NOK and SEK, due to the nature of their economies meaning they are exposed to global trade and global growth, we remain bullish on the Scandinavian currencies over the next 12 months. This is based upon our assumption of a global economic recovery in 2021 as economies begin to reopen and start rolling out vaccinations. However, in the very near term, our SEK forecast has been revised downward following the latest lockdown measures, resurgence in virus cases in Sweden, and the Riksbank’s pivot to further easing.


The antipodean currencies remain our two bullish conviction calls among the G10. With exceptionally well-controlled domestic coronavirus situations, unemployment is likely to peak at a significantly lower level than in Europe and the US. Fiscal policy has been rapid and aggressive. Together, these two factors mean that the recovery in both nations is likely to be rapid and may feature less “scarring” to consumer and business behavior than in peer economies. On top of this, both currencies are likely to benefit from improving external demand, especially Australia. These conditions are likely to lead to stand-out performances for both currencies. Negative interest rates are unlikely in Australia, and markets have recently significantly pared back bets for the policy in New Zealand. However, a longer path to vaccine deployment or less than satisfactory recovery could still lead the RBNZ down this path in 2021. Although not our base case, such a development would hamper the Kiwi dollar.


The Chinese yuan has been one of the standout performers of 2020, rallying nearly 6% at the time of writing. While much of this rally comes from China’s economic recovery leading the global recovery and the dissipation of trade risk after the US election, the positive growth outlook for 2021 combined with authorities’ renewed appetite for CNY strength means we are maintaining our bullish outlook. Our forecast for CNY envisages a 4.5% rally over the course of the next year as external demand conditions improve, stimulus measures domestically are scaled back and China’s economy continues to grow at a blistering pace.


While our 1-year forecast remains unchanged since October, the recent changing of the guard in the CBRT and the subsequent 475bp rate hike has brought forward our expectations of the lira recovery. Signs of policy normalisation are conducive to this view, as are our assumptions of a broad EM rally in 21H1 on renewed risk appetite. Our longer-term forecast remains unchanged at 6.8 however – previous lira crises show that TRY struggles to recover fully back to pre-crisis levels.


The global recovery from a deep recession in 2020 should pave the way for risk appetite to surge, which will benefit the real in an environment where real yields are negative in most advance economies. We continue to believe that BRL is poised to gradually recovery from all-time lows reported after the outbreak as high-yielding currencies gain attention in the EM space again in 2021. However, risks to the inflation outlook amid a slow immunisation path in Brazil dampens the real’s appeal in the interim. Fiscal concerns are also top of mind for BRL in the coming year. This has ultimately reduced our optimism for the currency’s recovery by 2021 year-end.





Ranko Berich, Head of Market Analysis
Simon Harvey, FX market Analyst
Olivia Alvarez Mendez, FX Market Analyst
Ima Sammani, FX Market Analyst



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