News & Analysis


2020 has proven to be a year for the ages, with the pandemic resulting in fresh economic and financial market records being printed. At the beginning of the year, the pandemic wasn’t on many people’s radars, but soon appeared as Chinese officials mobilised to lockdown the province of Wuhan. Markets weren’t too jolted by the news as the broad expectation was that this outbreak of a novel virus would be isolated to China. Soon, however, cases started to appear in other parts of Asia, such as Japan and South Korea.

Again, markets took a dim view on Covid-19 having more far-reaching consequences, which ultimately paved the way for the turmoil that was about to ensue in March.

At the beginning of the month, as cases started to appear in Europe, and later transmit to North America, central banks began to embark on coordinated action spearheaded by the US Federal Reserve. A suite of rate cuts, backed up by fiscal support schemes, echoed through markets, while central banks rolled out other 2008-09 facilities. Central banks had to battle with tightening credit conditions, disjointed bond markets, a lack of liquidity, and a flight towards the US dollar. Ultimately, these crisis-era measures proved sufficient to settle financial markets and ease financial conditions, while harsh nationwide lockdown measures proved somewhat effective in reducing the number of registered cases. The latter ultimately allowed many major economies to reopen to a large degree in the summer months, which kick started economic recoveries in Q3. However, this was ultimately short lived, and the colder months resulted in an increase in case count again. By this point, it was clear that better management and a more draconian stance towards the domestic outbreak would lead to a faster economic recovery later on in the year, which was evident in China, much of Asia, Australia and New Zealand. In Europe and North America, however, authorities struggled to contain subsequent waves of Covid-19 as the opted for more localised measures in order to avoid further national lockdowns. While initially this proved effective, towards the end of the year, new cases continued to rise as new strains of the rapidly spreading virus were discovered. Prior to this though, markets focused on the US elections in November. Relative to previous elections, especially 2016, the event resulted in less volatility in financial markets, despite the unwind of the “Blue Sweep” trade as pollsters’ predictions of a Biden landslide became less probable as the night progressed. While the election took some time to generate a clear winner, markets weren’t roiled too much by the threat of Supreme Court intervention similar to that in 2000. Instead, price action focused on the positive results from initial vaccine trials and the likelihood of their approval in December. This resulted in broad USD weakness towards the end of the year, which we believe will continue as a dominant theme in FX markets in 2021. To round up a volatile year, Brexit negotiations intensified and finally produced a narrow trade deal in the late hours on Christmas Eve, while the US narrowly avoided a government shutdown and a complete halt in government support for the labour market as a $900bn stimulus package found approval.

The turn of the year means a fresh start for many, but not for markets…

Many of the 2020 dynamics are set to spill over into 2021. Despite a Brexit deal being agreed prior to the end of the transition period on December 31st, teething problems to the new trading arrangement are likely to persist into early 2021, while an expansion in the narrow trade agreement could draw attention in the New Year. Additionally, the final result of the US election isn’t quite yet clear. While President-elect Joe Biden is set to be inaugurated on January 20th, the battle for the Senate remains in the hands of the Georgia run-offs on January 5th. Finally, with major economies still distributing vaccines while the number of new cases remains elevated, lockdown measures are likely to persist in the first half of 2021 until herd immunity is achieved. Disruptions to vaccine distribution and their efficacy remains a major tail risk in 2021.



Monday – 04/01

Turkish CPI inflation figures are released at 07:00 GMT along with eurozone and Canada manufacturing PMI figures at 08:00-09:00 and 14:30 respectively. Headline CPI in Turkey jumped by over two percentage points in November from 11.89% to 14.03%, and is set to climb further to 14.22% according to Bloomberg’s median forecast. The CBRT has shown commitments to lowering the inflation channel since the introduction of Governor Agbal back in November and has hiked the one-week repo rate by a total of 725 bps in two policy meetings, bringing the rate to 17%. With the CBRT being fully committed to driving inflation back into single digits, the lira recovered to levels last seen in October. The previous two rate hikes and possibly more to come should lift off some of the pressure on CPI figures in the coming months, while the recovery in the lira is also conducive to lowering inflation.

Eurozone manufacturing Purchasing Managers’ Index figures are all set to have increased since the November figures, however downside risks remain as some countries like Germany and the Netherlands imposed stricter lockdown measures throughout the last month of the year. Germany, France and eurozone PMIs will be final releases with no change expected, while Spanish, Italian and Dutch PMIs are set to print moderately above the 50.0 level mark between 51 and 55.

As Bloomberg does not provide a median of forecasts for Canada’s manufacturing PMI, the prior reading of 55.8, the latest virus conditions and lockdown measures, and other economic indicators should paint a picture of what the figure may look like. Downside risks remain as Ontario announced a month-long state lockdown this week.

Eurozone manufacturing PMIs crawling out of the deep hole but downside risks remain after renewed lockdowns

Tuesday – 05/01

On Tuesday, the Georgia Senate run-off is set to conclude. A separate section on this is included below.

The German unemployment rate is released at 08:55 GMT. Unemployment unexpectedly fell in November, but the Q4 restrictions to curb the second wave caused a jump in the number of employees on the kurzarbeit scheme. While even stricter measures have been imposed in December, the unemployment rate may not capture the full extent of this as the kurzarbeit scheme requires a reduction in employees hours which doesn’t contribute as “unemployment”. The unemployment claims rate is expected to print a 6.2% compared to November’s 6.1%, according to the median of forecasts submitted by Bloomberg.

US ISM Manufacturing at 15:00 GMT is set to print slightly below November’s reading, with the consensus foreseeing a print of 56.5. From March through October, the actual ISM PMI data has printed higher than their forecasts, signalling that markets have consistently underestimated the resilience of the American business sector since the pandemic. November was the first time the figure printed half a point below the consensus, as business shutdowns and personal restrictions slowed down the US recovery to a slightly higher extent in Q4 than what markets had in mind. This time around, with more states having implemented restrictions over the past month and the virus situation generally deteriorating, the index is subject to downward risks.

Wednesday – 06/01

China’s Caixin PMIs are on the agenda for 01:45 GMT and are set to show mixed readings throughout the different sectors. The manufacturing index is set to drop to 54.7 from November’s 54.9, while markets foresee an uptick from 57.8 to 58.0 for the services sector. Although the changes are minor, China’s PMI figures do show a difference from European and North American figures as the divergence between the manufacturing and services sector in the Western countries is the other way around, with services baring the brunt of the economic slowdown. China’s manufacturing PMI is set to remain depressed as long as lockdown measures are in place for China’s trading partners, although not as depressed as the services PMI in the eurozone, UK or US.

Unless the PMI figures wildly differ from the consensus and prior reading, the releases are not expected to provide any fireworks in currency markets.

Eurozone services and composite PMIs released between 08:15 and 09:00 GMT will mostly be final readings from Germany, France and the eurozone, with no changes expected since the preliminary December reading. Italy’s PMIs offers new December data, with the services and composite index expected to show a significant increase from 39.4 to 45.0 and 42.7 to 47.3 respectively – although the numbers all remain below the expansionary threshold of 50. The UK’s final services and composite PMI figures at 09:30 GMT are set to remain unchanged from the preliminary reading of 49.9 and 50.7.

Later at 19:00 GMT, markets turn their attention to the FOMC meeting minutes from December 16th. The key message from the Fed meeting  was that although policy remains accommodative, with near-zero rates and QE continuing for some time, the ball is basically back in Congress’ court. The size and scope of the QE programme were left untouched as the Fed likely wants to wait for further clarity over the long-awaited fiscal stimulus package before taking any monetary measures. The minutes will likely not include any surprises for that reason either.

Thursday 07/01

Sweden’s services and composite PMIs from Swedbank/Silf are on the agenda for 7:30 GMT. Markets should brace for ugly figures as Sweden introduced its toughest containment measures yet in the face of soaring virus numbers only two weeks ago. Non-essential public workplaces are closed until January 24, although restaurants are still open for groups of 1-4 people.

Eurozone retail sales are released at 10:00 GMT along with several confidence indicators. Retail sales from November are set to drop from 1.5% to -3.0%, the first negative reading since September, as the renewed lockdown measures likely left its mark on the retail sector. Economic, industrial and service confidence are set to slightly increase, however, according to the median of forecasts submitted to Bloomberg. With most of the eurozone still being in lockdown, the hard data figures may not look pretty, but the imposed measures or ugly data from Q4 have generally not dented the euro this quarter as markets showed their willingness to look through the near-term risks and focus on the resumption of global recovery in 2021 instead. This may explain the expected rise in confidence indicators in December.

Friday 08/01

It is that time of the month again, with Canada and the US releasing labour market data at 13:30 GMT. The recently renewed lockdown measures in both nations and the deteriorating virus conditions may not feed into the labour market data, however. Ontario only tightened measures a few days ago, which means their effects are unlikely to be included in this month’s labour market figures, and the measures implemented previously means there may not be that much extra tightening on businesses. US Nonfarm Payrolls are set to drop to 93K, down from last month’s 245K, while the unemployment rate is expected to increase only slightly from 6.7% to 6.8%. The unemployment benefits were set to expire on December 26th, but were extended under the $900bn fiscal stimulus package that was approved this  The weaker performance of the US labour market emphasises the need for the fiscal stimulus package that was passed this month, with unemployment benefits being extended through February 2021. The weaker performance of the US labour market is poised to highlight the negative impact of the delayed lack of fiscal support, after weeks of bipartisan talks on the next round of stimulus failed to deliver the much needed help before the elections.




While much of the US election has been finalised ahead of Joe Biden’s inauguration on January 20th, markets still await clarity on the direction of US policies under Biden’s administration and for that, the results of the Georgia Senate run-off on January 5th are key.

The Senate currently stands at 50 Republicans and 48 Democrats with two seats up for grabs.

Should the Democrats take both seats in the January 5th run-off, Vice President Kamala Harris will break any ties, meaning the Democrats will take control of the Senate. However, pollsters attribute this scenario as only 30% likely. On individual races, Five ThirtyEight has Republican incumbent David Purdue leading Democrat challenger Jon Ossoff by 48% to 47.6%, while in the other seat, Democrat Raphael Warnock leads Republican incumbent Kelly Loeffler by 48.2% to 47.7%. The polls are tight, and with over 2.3m people having already cast their vote – a record number of votes for a Georgia run-off – the margin for error is wide. This is especially true when factoring in how wrong the preliminary polls were for the 2020 presidential election.


FiveThirtyEight polling data shows both leads remain in the margin of error

With the inaccuracy of the polls high in the current climate of record turnout and elevated levels of mail-in votes, and the poll margins close, Georgia’s run-off may provide fireworks for markets upon their return in the New Year. A Democrat sweep would likely see markets price back in the “Blue Sweep” reflationary trade seen in the run-up to the election, albeit at a less aggressive rate due to the Democrats’ more fragile majority in the upper chamber. Under this scenario, markets will likely expect a more expansive fiscal stimulus package than under a Republican majority, with efforts aimed at bridging the gap between the current $900bn stimulus package and the $2.2trn stimulus package passed by the Democrat control House in October but rejected by a Republican Senate.

This would likely weigh on the dollar, like it did back on November 3rd when the DXY fell nearly 0.5%, as US Treasury yields simultaneously rise across the curve.

Conversely, a Republican held Senate will likely result in market participants trimming their expectations of the size of additional fiscal stimulus, but the prospect of the $900bn package being topped up remains likely. Senate Majority Leader Mitch McConnell will be more than aware of the upcoming mid-term elections on November 8th 2022. With the electoral map favouring the Democrats at the mid-term elections and 34 Senate seats up for grabs, McConnell will want to avoid painting Republican Senators as those standing in the way of a more robust economic recovery. This means that while resistance to more expansive fiscal stimulus will remain, the Senate will likely back more incremental measures to aid the economic recovery and prop up the ailing US labour market. We don’t see this as a big assumption, especially after Senate’s approval of the $900bn stimulus package, which comes $400bn above McConnell’s own proposal, and the Senate’s block on additional stimulus cheques that would bring the total amount of direct payments from $600 to $2000.  This scenario would still reinforce our view of sustained USD depreciation in 2021 as the emphasis will then be on the Fed to remain more accommodative for longer, but may result in a more stable dollar in January. Additionally, a divided government poses risks to the economic outlook should bipartisan relations breakdown.


Simon Harvey, Senior FX Market Analyst
Ima Sammani, FX Market Analyst



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