How will 2021 shape up in currencies? Taking a peek as Brexit and stimulus hit the finish lines

Nothing is normal in 2020 – including pre-holiday trading. Valeria Bednarik, Joseph Trevisani, and Yohay Elam discuss the latest Brexit and US stimulus developments heading into year-end. They also discuss the dollar and other currencies in 2021.

Yohay Elam:  With few days left to end 2020, markets are awaiting closures on Brexit and US fiscal stimulus. The latest from the old continent is that those EU member states have started to prepare procedures for a new trade deal from January 1, if one is agreed. How much is a Brexit deal priced into the pound?.

Valeria Bednarik: One week to go and still talking. I would say that the GBPUSD run to the 1.36 area came as a deal was being priced-in, and the latter retracement is the result of the latest tensions. Still, most of it is priced in. A wilder market reaction could be expected if there's no deal at the end.

Joseph Trevisani: Despite the reputation for British phlegm, keep calm and carry on and all that..the pound has been behaving like a skittish schoolgirl. As for US stimulus, I think President Trump will be sorely tempted to veto the bill, which is not really a pandemic relief bill but a pork-barrel grab fest. In the end, though I think he will sign. But all currency moves are exaggerated in the closing two weeks.

Yohay Elam:  Regarding Brexit, I agree that risks are asymmetric, more downside on a no-deal than an upside on a deal, but not a "buy the rumor, sell the fact". I would bet on a deal, there are small gaps about a minor industry, fisheries.

Valeria Bednarik: Trump is showing off. Losing the election was too hard for him. Now he wants to be the hero that wants to give the people more

Yohay Elam:  He did not say he will veto it.

Joseph Trevisani: Since a no-deal will be as much a disaster for the EU as the UK, I still an agreement at about 5 minutes to midnight.

Yohay Elam:  So I believe it is only a last-minute tantrum.

Valeria Bednarik: Yeah, agreed.

Yohay Elam:  At the time of our conversation, there is a full day until Christmas Eve, and both the EU and the UK will likely talk over the holiday if necessary.

Valeria Bednarik: On the good side, Brexit will be over with or without a deal FINALLY.

Joseph Trevisani: Yes, perhaps one of the points we tend to miss about all these endless crises is the get old.

Valeria Bednarik: Yups, too old at this point.

Joseph Trevisani: Does anyone think there will not be a deal?

Valeria Bednarik: Me. I still think there won't be a deal, they will trade in WTO terms and engage in neverending negotiations towards another kind of agreement,

Yohay Elam:  I think the French made their power play with the border closure, and will now compromise on some cod or herring. And I think that if Johnson compromises on fish, he will compensate fishermen the sums are too small.

Joseph Trevisani: I suppose the EU could prevent a deal just to sink the euro, but that seems a bit of a nose and face the problem. It would do far more damage to their economy than could be fixed by a cheap euro.

Valeria Bednarik: There have been lots of rumors, but we actually don't know if they agreed on a level playing field.

Yohay Elam: Silence about the LPF is a good sign.

Valeria Bednarik: I keep on hearing in my mind "significant differences".

Joseph Trevisani: Agreed.  I am reading a great novel by Alan Furst about Paris under the occupation. We sometimes forget the history there.

Yohay Elam:  "Nothing is agreed until everything is agreed" and then suddenly you get a 500-page document with too much information to digest and a rush to approve it.

Joseph Trevisani: The actual economic value of the fish is very small.  If that is one of the real sticking points, they will sign.

Valeria Bednarik: Yups, you summed it up, Yohay.

Joseph Trevisani: Sort of like the stimulus bill, 5200 pages and two hours to read it before the vote.  No way to run a government.  Designed and intended to conceal.

Yohay Elam: Yes, yet fish are visible, contrary to the abstract LPF, which is much more important.

Joseph Trevisani: One man's LPF is another's tilted pitch. Can we do anything with a LPS?

Yohay Elam: Indeed, and such decisions on the LPF are worth billions against millions related to cod.

Valeria Bednarik: The UK for sure can.. they already have that bill prepare to skip what they have already agreed. Guess that with a no-deal it will get approved. Internal Market Bill, that's it.

Yohay Elam: It seems they introduced that bill as a negotiating tactic. Did it work out or not? Markets don't care.

Joseph Trevisani: Perhaps the deal will come down to fish and chips access.

Yohay Elam: All they want is Brexit for Christmas.

Valeria Bednarik: Yups, seems possible.

Joseph Trevisani: I think most of the back and forth has been negotiating.  The governments know the danger of no-deal. Equities are enjoying a bountiful Christmas but much depends on the success of the vaccines.

Valeria Bednarik: Growth depends on vaccines. Wall Street depends on stimulus. Meaning, we have record highs in WS within the world suffering its worst economic contraction in decades...

Yohay Elam: I think the Federal Reserve remains the No. 1 force moving markets. An addition of $3 trillion to the Fed's balance sheet goes a long way.

Valeria Bednarik: Agreed.

Joseph Trevisani: Yes, rate repression is an effective tool for funneling private month to the stock market. The US 10-year Treasury yield is below inflation thanks to the Fed. Stocks around the world have had a good recovery.

Valeria Bednarik: What's good for stocks seems no good for the greenback. Ending 2020 at multi-year lows against most major rivals. Checking long-term charts, it seems it still has room to go down.

Yohay Elam: One development in 2020 is that the dollar has reasserted itself as the ultimate safe-haven. The yen lost its status late in the year, and gold's shine was always suspicious.

Joseph Trevisani: Yes, but needing Armageddon to rise, is not a good monetary policy I'm afraid.

Valeria Bednarik: But when you take a look a monthly charts, it seems the opposite. USD/JPY is ending a fourth consecutive year in the red if I'm not mistaken. The EUR advanced in 8 months what it lost in the previous two years.

Yohay Elam: Quite a divergence between these two major pairs.

Valeria Bednarik: Divergences are good. Else, will be boring.

Joseph Trevisani: The yen safety status is more followed when the source of anxiety is in Asia.

Yohay Elam: Indeed, related to the trade deal. So 2019!

Joseph Trevisani: It is interesting that once the existential threat of the pandemic received the euro moved well beyond the dollar's supposed safety or panic level.

Valeria Bednarik: Yeah. Well, my take is that we may see some action on that front in February/March. US-China trade tensions may come under the spotlight with Biden and once the current dust settles.

Yohay Elam: Yes, once the pandemic recedes with vaccines, perhaps in the spring, I would say May.

Joseph Trevisani: The Euro is particularly interesting. On what is its current strength-based?   Economic dominance? Political stability? Trade? I would have to say it is based on Fed rate repression.

Valeria Bednarik: Whatever the reason, the picture won't change in the near term.

Joseph Trevisani: Agreed, it seems we are still ways of economic as the basis for currency comparison.

Yohay Elam: Will the Dollar continue declining into 2021?.

Joseph Trevisani: If the main reason is the Fed, I think so. But if US economy improves in the first and second quarters, will that change?

Yohay Elam: If the US economy improves, which I think it will, perhaps we'll see extended risk-appetite and money flowing in search of riskier assets outside America.

Joseph Trevisani: But probably not to Europe, not the usual destination for risk capital.

Yohay Elam: Hard to get excited about European growth, but perhaps the ECB's massive stimulus would send money outside the eurozone?. I'm asking, but my answer is "probably not" – as ECB stimulus is minuscule in comparison to the Fed's.

Joseph Trevisani: Eastern Europe perhaps?

Yohay Elam: Indeed, perhaps Romania, where a lot of IT development is happening right now.