Trading Currencies: With a New Year Comes a Review

Happy New Year – A time of renewal, a time of new thinking and a time of excitement for change as we look to the future (even in the time of COVID).

We like to use the New Year to ‘review’ and see if we need to ‘renew’ or ‘rethink’ our FX strategy, which is what we shall do for this week’ piece.

Differences in the Global Trading Environment between 2020 & 2021

What’s changed from 2020 to 2021?

  • New administration in Washington
  • Brexit is finally complete
  • US rates have shifted

What hasn’t?

  • COVID-19
  • Unconventional policy the world over
  • Geo-political tensions – particularly in the Pacific

2021 Forex Trend Forecast

We will be watching for reactions to these points from both the fiscal and monetary sides of policy this year but what this means for FX based on the current setting is:

USD: New administration will mean increased US fiscal stimulus, and President-elect Joe Biden has already announced that he is assembling a multitrillion-dollar relief plan that would boost stimulus payments for Americans to $2,000. The discussions of the stimulus had triggered bearishness in the currency for most of 2020, but what will happen as it becomes a real event in 2021? It probably risks creating a US ‘exception’ narrative and may lead to a rise in market discussions of the Fed tapering. Either way the USD is near ‘rock-bottom’ pricing and in the short term a snap back may be seen.

EUR: Real yields and equity sentiment remain the key drivers of the EUR, ECB remains sidelined and fiscal support is piecemeal and country specific. Over 2021 it’s likely to rise naturally. Economists at Nordea expect EUR/USD to peak to the 1.25-1.27 level during the first 6 months of 2021.

GBP: Brexit is over and the oversold GBP had snapped back with gusto to end 2020. However, post-Brexit reality is COVID, as the country is now under its third lockdown, which could cause a probable double-dip recession and a likely BoE rate cut in Feb. Bearish here.

JPY: It remains a solid defensive play. USD/JPY had weakened due to the USD’s slide, however if as expected the USD finds support, the pair will struggle to fall further, much to the relief of the BoJ, which is extended until September 2021.

AUD: RBA is out of ammo in the medium term and Asia’s thrust for copper and iron ore is driving the AUD hard. However, AUD/USD is vulnerable to a short-term pullback on a pausing USD and profit taking – medium-term outlook is bullish and short-term outlook is bearish.

Key Events to Watch in the Coming Week

  • President-elect Biden’s speech – January 15, 2021
  • Fed’s Chair Powell’s speech – January 15, 2021
  • Inauguration of Joe Biden – January 20, 2021

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.