I hope you all had a great Christmas and New Year- in a blink it seems we are now in 2021, but fortunately, not carrying some of the baggage from 2020.
On Christmas Eve, the Brexit trade deal was agreed and was ratified last week- now, of course, this does not mean Brexit is over, there will still be further negotiations in other areas, but it seems free trade has now been agreed and there is now some certainty back in the market which will help Sterling along.
Before I look at potential outcomes for 2021 on the market, the first thing on the agenda is that the UK Covid situation does seem to be worsening still; with tighter restrictions on the cards again- it seems all that is left to do is close schools, and judging by the Prime Ministers language on Sunday, it seems this will be on the way shortly. On a positive note, the vaccine has been rolled out in the UK, and the Oxford-AstraZeneca vaccine will begin to be rolled out on Monday 4th January around the UK- which hopefully will immunise those at risk swiftly.
Below is my general view on particular economies on the basis that 2021 sees the pandemic being put to bed; I would suggest at this point that this is taking as a macro view and with a pinch of salt, as we have learned on a daily basis last year, things can change very quickly.
Which currencies will benefit the most from the vaccine?
Quite simply, I believe that the currencies that will outperform on vaccine progress may come from countries that have;
A) Ordered the largest quantity of vaccine doses per person from multiple companies.
B) Infrastructure and processes in place that allows swift, mass distribution of vaccines.
C) Suffered the largest economy blow due to the pandemic. (Larger room for a bounce back.)
At this point- here is a list of countries who have the largest confirmed orders of vaccines per head (In order from highest to lowest)
Based on the above, GBP & CAD appear to be two of the best placed major currencies to benefit from the roll out of vaccines in 2021.
2021 Global Economic Outlook
I believe that major economies should rebound in H1 2021 as restrictions are loosened.
- Virus cases should ease once peak flu season ends.
- Mass vaccinations will become available in the developed world in Q1.
- Fiscal and monetary policy to remain highly accommodative throughout the next year.
- Lots of pent-up demand among consumers.
- The rebound will be gradual as restrictions will be carefully unwound.
- This should be supportive of risk currencies (Such as GBP)
I believe the U.S economy may underperform it’s peers in 2021.
- The U.S Government has placed little emphasis on job retention during the crisis.
- $600 additional unemployment benefit insurance ran dry in July.
- Labour market has held up better than first feared- a “V Shape” recovery is on the cards.
- Fed has indicated no rate hikes through 2023.
- QE programme has been restarted- will run without a limit.
- No appetite for negative interest rates.
What to expect from President Biden
- The election victory for Joe Biden has buoyed risk appetite in the financial market due to increased chances of a Fiscal package and less protectionism than Trump.
- While Biden’s margin of victory was comfortable, the Democrats failed to win control of Congress.
- Weaker Dollar expected under Biden Presidency.
European economy will likely contract in Q4, but I am optimistic about a strong rebound in 2021.
Large fiscal & monetary stimulus packages should support economic activity next year.
- ECB policy to remain highly accommodative.
- EU’s 750 Billion Euro recovery package expected to be made available in January.
- European Government’s job retention policies and deficit spending will be supported by ECB’s PEPP.
- The ECB is now projecting growth of 3.9% in 2021 and 4.2% in 2022, and there is room for upside surprises.
For those trading EURUSD and other Euro based pairs- The ECB appear concerned about Euro strength, which may put a cap on currency gains in 2021.
Now the Brexit free trade deal has been done, much of the risk we were looking at in December has now gone- however it is important to look at how the UK has performed during 2020 to give us an idea of what 2021 will look it.
The UK economy suffered one of the largest contractions amongst developed nations in Q2.
- GDP 8% lower then pre-crisis levels in October
- UK Virus restrictions among strictest in Europe
- Brexit uncertainty may continue to weigh on business activity in 2021 (Even though deal has been done)
The two positives I do see for the UK though is that the UK Government has placed a heavy focus on job retention with the Furlough scheme being extended until March, and mass vaccinations are on the way.
As far as monetary policy is concerned, the main risk seems to be the BoE looking at negative rates, so far the market is pricing in a 1/3 chance of sub-zero rates by the end of 2021- this would not be a good scenario as there is no evidence that negative rates actually work- I think QE will be the “tool of choice” for policymakers, and recovery should mean no need for negative rates.
If you are looking to plan your currency purchases either for Q4 or for 2021 as a whole- please don’t hesitate to contact me so we can go over the best plans of action for you.