investment insights
Biden win unravels Trump risk premium
Key highlights
Improved risk appetite is weighing on the dollar, and will likely continue to do so in the months ahead
- We keep our euro-dollar forecast at 1.21 by year-end
- Euro/Swiss franc should gradually gain, as Swiss outflows pick up
- The EU and the UK inch closer to a deal, which should underpin sterling
- Higher risk appetite poses a near-term risk to dollar-yen downside, but the medium-term downtrend remains in place
- We further lower our dollar-yuan downside, with Chinese authorities showing increasing ease with a stronger currency. We expect 6.55 at year-end
- Upgrades to H1 emerging market GDP consensus estimates and the emergence of a vaccine could see some modest GBI EMFX gains in Q1, but we are cautious thereafter, and prefer to remain selective
The result of the US election, together with positive news on the virus vaccine, is helping unravel the Trump risk premium that was embedded in the price of the dollar. Despite a split US Congress, Joe Biden’s presidency will help alleviate trade-related risk premia and allow the flow of global trade to pick up. Furthermore, a gradual return to normality thanks to vaccine breakthroughs will see the market pricing a lower risk of further restrictions, and therefore higher growth. All this should be USD-negative; to some extent, however, it has been priced in – mostly in the G10 FX universe. Consequently, we maintain the view of further dollar weakness. However, we believe that a rotation away from G10 and into select emerging market (EM) currencies is brewing.
We keep our target of 1.21 by year-end for the euro/US dollar (EURUSD), and see some further modest gains in 2021. EURCHF should also move higher, supported by improved risk appetite and Swiss residents’ outflows.
We maintain our overweight in GBPUSD. The UK and the EU are inching closer to a deal, which should underpin the British currency for a move towards 1.35-1.37. At the same time, the sharp rally in risk prices has interrupted the downtrend in USDJPY but has not changed the medium-term dynamics. Positive news is already in the price, while the dollar trend has historically been more important for USDJPY direction than have equities. Nonetheless, we acknowledge some upside risks to our forecasts.
The Nordic currencies should remain underpinned by their pro-cyclical nature; we reiterate our call for NOK outperformance. Finally, in G10 FX, the commodity FX bloc will continue to receive support from improved risk appetite, although gains may be modest due to less compelling valuations.
We further revise down our already bearish USDCNY view, now forecasting 6.55 and 6.40 on three- and twelve-month views. Beyond superior macro fundamentals and much improved balance of payments flows, the increasing tolerance of authorities for a stronger CNY is a key reason. With Mr Biden winning, we assume some reduction in trade uncertainty, but do not bet on an automatic or rapid reduction in Section 301 tariffs on China goods. Still, a reduction is plausible, and would introduce further downside risks to our current forecasts.
Using modest energy price assumptions (USD 45 per barrel 12 months out) and inputting consensus EM vs US growth forecasts for H1 2021, our GBI EMFX model suggests that the index could see some gains over H1. We are always guarded when making an index call given the great heterogeneity among the 18-19 countries. However, factors driving some stabilisation of the weakest EM currencies (like TRY and ZAR – see CEEMEA section) – in addition to the potential for improving sentiment on a vaccine – point to some possible gains in Q1 2021. However, low-for-longer energy prices and still-high debt loads will constrain further gains. We maintain our preference for CNY, TWD, KRW, CZK, and PLN. This month, we upgrade CNY and downgrade the PEN and CLP.
Main risks to our views: First, a delay in the development/distribution of virus vaccines could increase the risk of new restrictions and economic disruption. Second, a premature withdrawal of fiscal support. Third, the US Federal Reserve (Fed) turning less dovish.
Wichtige Hinweise.
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