FX Talking: Painting in broad brush strokes
Early FX trading in 2021 has seen the dollar find some support from higher US yields. 2021 should not be the year to pencil in small corrections, but more to paint with broad brush strokes the major trends set to dominate the year. This includes a global recovery which emerges from 2Q onwards, central banks slow to withdraw stimulus and a broadly weaker dollar.
Executive summary
For EUR/USD we could well see consolidation in a 1.20-1.25 range through 1Q21. As more convincing signs of recovery emerge, especially in Europe this summer, we look for EUR/USD to push on towards the 1.30 area by year-end. In effect we are looking at a more modest repeat of the 2003-2006 period, when a global recovery drove commodity prices higher and the dollar weaker – and the ECB had to suffer a stronger EUR/$.
Elsewhere in Europe we continue to favour those currencies exposed to the global recovery cycle (especially NOK, SEK) as well as though potentially benefiting from some early tightening – Czech koruna. Despite FX intervention to slow its advance, we also see a stronger Polish zloty as well. The RUB and TRY should stay supported this quarter.
Elsewhere, FX reform in China means that market trends will have a greater say in Renminbi pricing. We now see USD/CNY heading down to the 6.20 area by year-end, providing a tail-wind for Asian FX. Buoyed by the commodity rally, many Latin currencies are performing well. We would still prefer to back BRL over MXN, where the latter could be undermined by a more dovish composition at Banxico and a 100bp easing cycle.
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