FX top trades for 2021

Market movers today

In the euro area, retail sales for October are due, which are likely to surprise on the upside after the strong German numbers yesterday.

In the US, ISM non-manufacturing for November is likely to have fallen given the third coronavirus wave in many states but the US service sector is still faring better than its European peer.

OPEC+ is expected to make an announcement on its production cuts after tense negotiations in recent days. The proposal is said to focus on taper production cuts.

The 60 second overview

COVID-19. In the UK, the Pfizer/BioNTech vaccine shot got the approval from the health authorities yesterday. It is expected that 800,000 doses are ready to be rolled out as early as next week. Germany and Italy are introducing new restrictions. In Germany the restrictions were extended to 4 January 2021, as there has been no material progress on getting the seven-day incidence closer and below the 50-mark (from currently around 130 per 100,000). In Italy movement between regions is restricted from 21 December until 6 January.

US stimuli plan. US House leader Pelosi and NY Senator Schumer support the USD908bn bipartisan proposal that was announced on Tuesday. With the Democrats lowering their package proposal from USD2.4trn to support the bipartisan proposal, a fiscal deal is more likely. The Republicans and notably Mitch McConnell still need to back this ahead of the expiry of support packages later this month. Speculation suggests that a deal may come as early as this weekend, but this seems on the optimistic side.

EU spat over NGEU. EU diplomats said that the rift with Hungary / Poland on the NGEU budget and the rule of law is getting worse. Our baseline (60%) remains that a solution will be found as there are strong interests on both sides (countries need money and stability, not political chaos and market turbulence) and we look to next week's EU Council meeting on 10-11 December, but we also acknowledge a risk of a solution being delayed. In the adverse scenario of no solution, this has the potential to trigger a significant political crisis in EU.

Equities. Global equities ended yesterday slightly higher as risk appetite rose during the day and S&P500 posted another all-time high. Defensive outperformed cyclicals for a change but not with a clear pattern around the globe. Value stocks outperformed growth by 0.5% driven by energy and bank stocks, as the oil price rose and bond yields ticked higher.

Asian stocks are mostly higher this morning again led by South Korea. US and European futures are slightly lower.

?FI. Core and semi-core European yields rose marginally in the longer part of the EGB curves, while peripheral yields performed in a general tight trading range. Not even Lane's remarks changed market sentiment. Bunds led the underperformance by 0.5bp.

FX. EUR/USD continued to climb higher yesterday and reached the 1.21 mark. The oil market and EUR/NOK are steady before the OPEC+ decision on whether to hike output.

Top Trades 2021. It is that time of year again and we present our FX Top Trades for 2021. We dive into five themes, we think will set the tone next year. We look at (1) strategic drifts related to risk-adjusted real interest rates, unit labour costs and/or terms of trade, as well as net international investment positions. (2) The market and our view that oil prices are not yet in for a structural slump even if the focus on renewables increases. (3) The USD cycle, which has yet to turn. (4) The USD money-market lull that could very well come to an end in 2021 as the demand for USD liquidity remains even if crisis measures run off. And finally, (5) the Chinese cycle may peak in H1 as the structural need for deleveraging manifests itself yet again. On the back of these five themes, we further present our eight top trades for 2021. They include both spot and option trades covering majors, Scandies and EM.

Credit. Credit markets almost did not move yesterday, with both iTraxx Xover and Main unchanged and cash bonds only seeing marginal changes.

Nordic macro and markets

In Norway, a limited supply of housing relative to demand has set the stage for some strong bidding and so rapidly rising house prices. We expect seasonally adjusted housing prices climbed another 0.5% m/m in November after strong growth the past two months.