US dollar expected to continue its decline in 2021 and it could surprise with its big magnitude

1. What will 2020 be remembered for in the markets?

Of course the pandemic, but also the impressive speed at which policymakers have responded – especially on the fiscal side. The word ‘austerity’ has not been mentioned at all and the agreement to finance the EUR750bn EU Recovery with joint debt has been a major break-through (and probably not fully appreciated by the Euro just yet). What also resonated with me recently was the historian, Simon Schama, describing 2020 as the ‘rescue of the enlightenment’. It has been a triumph for science. 

2. How was your trading year? How did the pandemic influence your trading?

I’m in research and can honestly say that demand for research has soared. Of course, we’ve had to present a lot of scenario analysis, but I’m pleased to say that our core FX view of the Fed successfully addressing money market challenges and the dollar entering a benign decline has worked out this year. Research teams have had to be nimble this year, but an understanding of cross-asset market interaction and global capital flows and how they influence FX markets has been very useful.

3. Which emerging trends or issues should traders prepare for in 2021?

Consensus expects a continuation of the broad dollar decline next year, but could be surprised with its magnitude. It could be closer to the 10% area, than the 3-5% which consensus expects. What will be crucial is how the Fed handles, if it is successful, the pick-up in inflation. Average Inflation Targeting in theory means with the Fed will happily watch inflation push through 2%. But what happens if the US yield curve steepens too fast?

4. Which will be the best and worst-performing currencies in 2021 and why?

I think it will be a good year for emerging market currencies and we like north Asia (China Renminbi, Taiwan Dollar and Korean Won). Monetary policy in developed markets is encouraging investors to move out along the credit curve and flows into north Asia (which tend to have large weights in EM benchmark indices) should drive these currencies higher against the dollar. We also like selective currencies in Central Europe, e.g. the Czech Koruna, where the Czech central bank may hike twice in 2021.

5. Which under-the-radar currency pair do you expect to make a big move in 2021?

In a reflationary year, commodity currencies should continue to do well. Based on our call for high energy prices, the Colombian Peso could do well in 2021.

6. Which macroeconomic events will have the biggest impact on the FX markets in 2021?

Away from Brexit, we should probably expect scrutiny to fall increasingly on the Fed in 2021. Is it comfortable in keeping real rates so negative if, hopefully, growth and inflation are rising? We should also keep an increasing focus on climate issues, culminating in the COP26 in Glasgow next November. Global policymakers seem to be tackling climate change with renewed vigour and a greater focus on faster energy transition and declining demand for fossil fuels could be an under-appreciated story in financial markets.

7. Who are the people to watch in 2021 in terms of impact on the markets?

Of course, we would all say Joe Biden. Markets expect his policy priorities – especially international policies – to be the exact opposite of President Trump’s. How Joe Biden handles China in 2021 will be fascinating for markets.

8. Which asset class will cause the next paradigm shift in the markets?

Two areas here. As an outside observer, I think credit will be interesting. Eg will zombie companies in the high yield space be kept on life support or will delinquencies finally rise? Digital currencies (both private and public) will also be in focus. Libra’s rebranding as Diem will be scrutinized for the degree it can compete with fiat currencies in transactions. Equally, central banks have geared up focus on Central Bank Digital Currencies (CBDC) and here markets will want to see how central bankers tentatively progress without triggering any disorderly disintermediation of the banking sector. 

9. What will you be focused on next year?

I’m always interested in the broad dollar trend. A hot topic as we end the year is currency manipulation. Strengthening of the US Treasury’s semi-annual FX report over recent years was designed exactly to promote the orderly re-balancing of Balance of payments positions - code for ‘Don’t interfere in a dollar bear trend’. If we are right with our dollar call for 2021, many nations will be struggling to tame domestic currency appreciation against the dollar. Let’s see how this pans out in practice.   

10. What are your New Year's resolutions?

Improve my Italian cooking.