FX Talking: Conviction call on a weaker dollar

In its simplest form our view sees a complete unwind of the dollar rally since March 2018 – when President Trump fired the starting pistol on trade wars. The further reversal of those dollar gains should mean that the dollar falls 5-10% against most currencies in 2021.

Central to this bearish dollar call is: (i) continued good news on vaccine approvals and roll outs such that economic growth can accelerate (probably from 2Q onwards) and (ii) the Fed keeping the punchbowl of cheap liquidity in place and not blinking when inflation starts to rise. Let’s see how average inflation targeting works in practise. We retain a 1.25 end-2021 forecast for EUR/USD. This could easily be revised to 1.30 if European leaders can successfully avoid the pot-holes of a hard Brexit and a stalled EU Recovery Fund. We should know more soon.

The ECB may not like the EUR/USD rally, but as the world’s second largest reserve currency, the EUR looks set to receive much demand from FX reserve mangers, recycling dollars accumulated through intervention.

In Europe, some key trends we like include continuing strength in the Scandies. The Czech koruna should be our top Central and Eastern Europe performer as the central bank hikes rates twice. We also like the high yielding Turkish lira and Russian rouble. Under-performing should be the Swiss franc (unwinding trade war gains) and the very fragile South African rand – South Africa is saddled with exceptionally heavy debt levels.

In Asia, we expect a continuation of gains of those currencies with large weights in emerging market benchmark indices – so China's yuan, Korea's won and the Taiwan dollar. India's rupee looks a serial under-performer. And in Latam, we like Brazil's real and the Colombian peso – the latter very much contingent on our bullish oil forecast.