News & Analysis

January has proven to be an indecisive month for FX markets. After looking through most of the near-term risks in December and the first week of January, tighter lockdown measures and concerns over vaccine efficacy and distribution thrust the previous risk environment into a bit of a tailspin.

January proved to be an indecisive month for FX markets. After looking through most of the near-term risks in December and the first week of January, tighter lockdown measures and concerns over vaccine efficacy and distribution thrust the previous risk environment into a bit of a tailspin. The level of uncertainty surrounding vaccine distribution resulted in a mild bid in the dollar against key trading partners such as EUR, JPY and CAD, resulting in the DXY index rising 0.97% over the course of the month. However, strong vaccination developments in the UK, and limited Covid cases in antipodean nations, meant the higher beta currencies have been somewhat sheltered from the dollar’s rebound.

Meanwhile, central bank meetings throughout January saw cautiously optimistic tones struck. The Bank of Canada was arguably the most hawkish, leading us to believe that their QE programme would be tapered by year-end, while the European Central Bank refrained from giving markets clarity over their PEPP purchases. However, with so much uncertainty still pertaining to the economic outlook at present, most central banks were cautious in not providing any additional guidance for markets in regards to monetary policy – this  was best evidence by Chair Powell on January 27th.

Looking ahead to February, without further clarity on the distribution of vaccines in major economies, the risks to our bearish dollar view remain tilted to the upside, especially in a backdrop of additional US fiscal stimulus.

However, developments have yet to alter our structural view on the dollar over the next 12-months, although, some currencies, such as RUB and CHF, have seen the near-term forecasts altered to reflect the resurgence in risks attached to their outlooks.



Sterling’s ability to rally over the course of an uncertain January provides us with confidence going forward that the rally will be able to continue throughout the year as global economic conditions improve.

Rapid vaccine distribution in the UK bodes well for the domestic economic recovery in the short-term, resulting in us upgrading our near-term forecasts.

We have subsequently upgraded our 12-month view to continue reflecting our structurally bullish view on the pound, however, it must be noted that risks to this view remain elevated. The risks are largely focused around the efficacy of vaccines distributed against new variants of Covid-19, which are highly prevalent in the UK, and could in turn mute the ability mass immunisation programmes have on allowing the UK economy to reopen. A comprehensive view on GBP is available in our latest GBP outlook.


We maintain our optimistic view on EURUSD as the eurozone gradually catches up with the speed of vaccine distribution in other major economies, raising the prospect for restrictions to be eased over the medium-term. The euro underperformed our expectations last month as delayed vaccines and further containment measures dampened the economic outlook. However, considering the euro took a limited hit from these events and the ECB sits comfortably in its current policy setting, the currency should continue to advance as the dollar downturn carries on. Risks to our forecasts are tilted to the downside, however. Additional fiscal stimulus in the US, verbal headwinds from the ECB, and delayed vaccine distribution in the eurozone could all limit euro upside.


Our January one-month forecast of 1.28 proved to be correct in measuring the loonie’s rally against the dollar in a period of high uncertainty. While we have revised down our 1-month USDCAD forecast to 1.27 to reflect our view on a sustained rally in the loonie, we continue to see the loonie’s price action in such an environment as muted and at the mercy of global risk sentiment. Risks to our USDCAD forecast remain tilted to the upside, especially with Canada struggling with the delivery of vaccines despite elevated pre-orders. Additionally, President Biden’s “buy American” policy poses risks to the outlook for Canada’s trade balance. More details on how this will impact Canada’s exports are expected over the coming month.


Our longer-term view for the Scandies remains unchanged, although some changes to the economic outlook are worth mention. The Norwegian krone benefited from a rally in oil prices, which caused NOK to slightly overshoot our previous forecasts against both the euro and dollar. Our medium-term forecasts remain unchanged, however, as NOK should still benefit from the global economic recovery and the Norges Bank being the most prone to normalise monetary policy in the G10 space, signalling a rate hike in H1 2022 already. As for the Swedish krone, the Riksbank recently announced a three-year plan to buy SEK5bn worth of FX each month for the next three years as an attempt to slow down the EURSEK decline. As we already foresaw moderate declines in EURSEK over the course of the next 12-months, our krona forecasts remain unchanged. Downside risks to our outlooks on the Scandies remain as Sweden and Norway both recently tightened measures further to mitigate the spread of the new virus variant, however with an eye on the global recovery in H2 2021, both currencies should benefit from their procyclical nature.


Our view on the yuan remains largely unaltered. With our 1-month forecast of 6.5 largely met at the end of January, we now anticipate a slower rally in the Chinese currency as the pace of economic growth begins to ease. Signs from recent data point towards weakness in domestic drivers of economic activity, at a time when we expect fiscal support to ease and monetary conditions to begin tightening. The PBoC recently gave markets a glimpse at what this would look like when they drained liquidity from the interbank market. This resulted in equity prices being hit and the yuan weakening somewhat.


The ruble didn’t enjoy the rally in oil prices as much as other petro-currencies like NOK or CAD over the course of January, as the return in political risk has been weighing on the currency over the past month.

As mentioned before in our last RUB outlook, escalations in geopolitical risks remain a primary concern for our RUB forecasts.

Political tensions have escalated recently due to the arrest of Kremlin critic Alexei Navalny, with subsequent protests domestically and international condemnation capping any RUB recovery. Reflecting the prospect of additional sanctions from the EU in the near future and the recent hit to investor confidence, we have revised up our USDRUB calls for the 12-month horizon, owing to the fact that RUB recoveries from the implementation of sanctions tend to be protracted. Meanwhile, risks of additional US sanctions remain elevated under the Biden Administration, although the US President is unlikely to prioritise the introduction of significant economic sanctions to Russia.


We have maintained our bullish call for the real by year-end as the currency remains attractive due to the prospect of an early hiking cycle by the BCB this year, while monetary policy in most EM and advanced economies stays put.

Additional fiscal aid on the horizon will further expand the rapid economic recovery in 2021, mitigating the impact of restrictions to activity on the back of increasing infections and delayed vaccination rollout.

However, short-term downside risks are particularly pronounced for the real, as the February elections of Congress Speakers unfold and uncertainty over the commitment of the country to abide by the constitutional spending cap remains unclear. Both the fiscal outlook and the severe Covid situation pose major challenges for the highly indebted Brazilian economy, rendering the BRL extremely volatile looking ahead. More information is available in our BRL outlook.


Simon Harvey, Senior FX Market Analyst
Olivia Alvarez Mendez, FX Market Analyst
Ima Sammani, FX Market Analyst



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