By Jeremy Thomson-Cook, Chief Economist at money management specialist Equals Money, part of the Equals Group.
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 expect to see a huge focus on recovery this 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.
Successful logistics 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 remaining at ultra-low levels throughout this year, and in certain cases, longer still.
When it comes to sector-specific recovery, the travel, airline, and leisure industries are expected to make a strong comeback when restrictions ease as consumers look to make up for lost time.
By contrast, commercial property and real estate are likely to face challenges as businesses revaluate how they use office space after nearly a year of successful remote working. This struggle will also be reflected by the increasing amount of empty retail space on British highstreets after the sector, and some of Britain’s most established brands, were hit hard in 2020.
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.
Politics is likely to have less sway over sterling in 2021, with the 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, we do expect to see it move higher against the US dollar in the coming months.
All signs point to a strong start for the euro, and we expect it will continue the strength it showed at the end of 2020 for the months to come. Its counterparts in Scandinavia (NOK, SEK) and in Central and Eastern Europe (PLN, HUF) may even outperform the single currency as the Eurozone recovery outpaces the US and UK’s.
Markets are pleased that the Eurozone has managed to come together during a time of crisis and offer businesses and consumers both fiscal and monetary policy support. The political agenda looks a lot quieter for 2021, and this lack of political pressure coupled with a central bank that has shown its strength through the Pandemic Emergency Purchase Program, means sovereign risk is very low.
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 is likely to normalise global trade and expand spending.
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, we expect the dollar to lag against both GBP and EUR, as well as other emerging currencies – the Chinese yuan, Russian ruble and Indonesian rupiah – 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).
Whilst the Japanese yen may enjoy some strength against the USD in the coming year and remains one to watch, we expect it to slip on a broader basis.
The Australian dollar has acted as a poster child for the recovery in risk assets since the early days of the pandemic, and its likely to remain ahead of its counterparts for the early part of the year.
Australia’s handling of the pandemic to date gives it an advantage over the likes of the UK and US, and as it enters the summer months with a vaccine rollout all but underway, the outlook is positive.
If market minds are focused on a recovery then we will be looking for a higher AUD, and it is not out of the realms of possibility that it could outperform the majority of the G10.
If 2020 taught us anything, it’s that nothing’s set in stone and as we start the new year in another lockdown, it looks like that’s set to continue for 2021. Either way, we’ll see the uncertainty of the world we live in continue to be reflected in the market and currency activity across the globe.