FX: Most Important Themes of 2020

On this last trading day of the year, we want to take a look at some of the most important themes of 2020.

For the forex market in particular, we see four primary drivers -

1. US-China Trade War - US and China trade relations will remain front and center. In early January, we expect the Phase 1 trade deal to be signed but the broader trade war may last past 2020. The key question is whether it will worsen or stabilize ahead of the November election. There's no question that it will in a major issue for all Presidential candidates but more tariffs in 2020 would only restore risk aversion and risk sending stocks tumbling lower. One of President Trump's greatest "accomplishments" is the record highs in US stocks and he knows that his reelection bid will be killed by a crash in equities. So instead he may offer China a second olive branch that would be applauded by the markets. In the near term, the Phase 1 deal has been largely priced into currencies so signing the agreement may not lead to additional gains for AUD and NZD. However over the course of the year, we could see a stronger rally.

2. Political Uncertainty in Europe Gives Way to US - 2019 was marked by political uncertainty in Europe and while Britain has a big decision to make by the end of January and the challenging job of negotiating individual trade relationships ahead, we expect political uncertainty in Europe to give way to political uncertainty in the US. It's an election year and in some ways, the balance of global growth and economic stability hinges on who wins. Another 4 years of President Trump could mean more protectionism and slower growth abroad. But in the near term, we expect Trump to do everything in his power keep the party going in stocks and that include more tax reform. The stakes are high and investors around the world will be watching the US election and President Trump's policy moves very closely.

3. No Recession, but Muted Growth - In 2019, all of the major economies avoided recession. Germany came close but growth expanded a modest 0.1% in the third quarter. For much of the world growth in the past year was very slow and we expect much of the same in 2020. The focus on the Presidential election in the US could limit major policy actions which could be negative for the dollar as it makes it difficult for businesses to plan ahead but expect the same lack of policy moves abroad. In Europe, Boris Johnson will be hard at work negotiating individual trade agreements. By 2021, we'll know the outcome of everything but between now and then we don't expect any significant acceleration in economic activity across the globe.

4. End to Easing & Hunt for Yield - As a result, the main driving force for currency flows will be the hunt for yield. Most central banks have said that they are open to further easing, we believe that most if not all major central banks are done with rate cuts. We could get one additional move from the Reserve Bank of Australia, Reserve Bank of New Zealand or the Bank of Canada but the odds are low. The end of easing returns the hunt for yield. The US and Canada currently have the highest interest rates of the major economists followed by New Zealand. Japan, Switzerland and the Eurozone have the lowest. Of these central banks, the Federal Reserve is the least likely to lower interest rates in 2020. The Fed has made it clear that even if that may be the case rates will stay low for long. However we expect the Fed to be the first to raise interest rates and if that intention becomes evident in 2020, it will be a good year for the dollar.

Tune in the day after New Years for a look at how the Dollar and Euro performs in election years.