2020 was a year that changed almost every aspect of our lives, and currency markets across the world reacted with volatility. Complacency, panic, and isolation have influenced activity over the last 12 months and most recently, a semblance of hope has been seen as vaccines offer the first glimpse of a ‘way out’.
While 2021 will hopefully see us on the road to recovery, we’re certain to be dealing with the longer-term economic effects of the pandemic for years to come, while also navigating a post-Brexit outlook. So, what can we expect from currencies and markets in 2021?
A Focus On Recovery
Once the impact of mass-vaccination starts to be seen across the world, we may see a huge focus on recovery later in the year.
Investors are expected to move away from considering the US dollar and wider developed markets as the best place for their money, with an increased interest in emerging markets. Commodity prices are likely to remain high as demand recovers and the global supply chain gains pace due to growing confidence from consumers to spend their cash.
Supply Chain will play a pivotal role on the road to recovery, with the ability of governments to both reliably and speedily vaccinate the population while driving the global economy from a trade point of view, essential for success.
All this is underpinned by the assumption that interest rates will remain at ultra-low levels throughout this year, and in certain cases, longer still.
What will we see from currencies across the globe?
The pound is reacting to a UK economy still very much in the grips of a pandemic, with strict lockdown measures likely to be in place until at least March. Add to that a new relationship with the European Union, and we’re likely to see the pound underperform in 2021, particularly against the euro. Not to mention anecdotal evidence of a potential new strain of the Covid-19 virus.
Politics is likely to have less sway over sterling in 2021, but one must take exception of the upcoming elections in Scotland which are likely to raise the chances of another Sottish referendum on independence.
Despite the expectation that the pound will have a modest year, I do expect to see it move higher against the US dollar in the coming months.
The US dollar is likely to remain weak as investors who have bought into the dollar during Trump’s tenure in the White House react to the transition to a Biden Administration – a change that may likely lead to normalise global trade and expand spending however, we see the dollar sharply declining as investors and FX traders take their action overseas.
US businesses have struggled with international relations under the watch of a Trump administration and a calmer stewardship of trade should help to boost corporate profits in the coming months, allowing for further USD depreciation.
If the UK, Asia or the Eurozone are able to move forward with their pandemic recovery faster than the US, I expect the dollar to lag against both GBP and EUR, as well as other emerging currencies such as the Chinese yuan in 2021.
The Japanese yen has acted as a safe haven from negative investment sentiment throughout the Covid-19 pandemic, and arguably long before that, pushing higher against other currencies in 2020.
While the yen would typically be sold off by investors in favour of more attractive investments, the overall outlook becomes more positive as it continues to show strength as we enter 2021. This could be down to the strange markets that we are currently navigating; vaccine joy tempered by very real near-term pandemic problems. Investors may also be positioning themselves for a wider retreat in the US dollar (USD).
Overall, we are seeing a massive migration of FX investments towards APAC and EMEA and that trend will continue throughout the 2021 year especially with a declining dollar and uncertain trade outcomes.
Question: What is your outlook on the USD? Let us know in the comments!
Ralph Castro is The Remote Firm’s Industry Analyst providing rich industry research which includes but not limited to 5 year risk forward looking metrics, risk profile and industry outlook.