Welcome to 2021, and as usual at the turn of each new year, it’s time to throw out some FX ideas and wacky predictions for 2021!
But first, a quick recap of 2020…
Last year, we thought the odds were very high that 2020 would be another strong year for risk assets. Expectations were that central banks would likely continue to support the global recovery and offset the uncertainty from trade tensions between the U.S. and China, as well as the “deal or no-deal” Brexit situation.
Well, for anyone who hasn’t been on an island in the middle of the Pacific all year, we did see central banks continue to stimulate the global economy, in a big way in fact! But it wasn’t to offset geopolitical issues, it was to battle the massive economic depression that COVID and the lockdowns brought on the global economy.
Once the new massive stimulus measures were in place in April, risk assets ran far to the upside and the U.S. dollar was beaten like a drum. The Greenback lost roughly in a range of 6% – 25% against the majors from its March pandemic peak, and closing 2020 as the worst performing major currency of the year.
Could we see another rally in risk assets in 2021 as support is still needed during a pandemic?
Another great year for risk assets?
Of course, looking out one full year out is pretty much impossible as demonstrated by the events that shaped 2020, so we’re not going to even try. But here are the themes that will likely shape the financial markets for the first few months of 2021:
Recovery/vaccine trade will continue to dominate broad risk sentiment.
Right now, economic data seems to be peaking, but expectations are that as vaccine distribution grows (in combination with mask/social distancing practices) hospitalizations/death rates will likely decrease. Lockdowns will be reduced / economies will open back up quickly.
A boom in economic activity could take place as people are so over with the pandemic. Most folks who have the means will be eager to spend what they’ve saved up on commutes, dining out, and shopping throughout 2020.
Those who have been severely hurt by the pandemic will hopefully see government support. If so, this will at the very least likely delay an economic / financial market shock scenario in the first half 0f 2021.
Risks to this outlook could be any combination of the following scenarios: new coronavirus strains resistant to current vaccines, vaccine distribution slower than expected, failure of governments to provide additional (or any) fiscal support to those most in need, or another black swan event hits the globe.
Central bank expectations for 2021 – Fed, ECB, BOJ, BOE are likely to remain extremely accommodative.
No additional monetary stimulus will not likely be needed as long as markets continue to function normally and pandemic/economic conditions do not worsen.
No policy tightening either as economic growth will not likely rebound evenly and fast enough to sway central bankers towards reducing QE / raising interest rates.
Inflation is a concern after 2020’s massive stimulus measures, and if that rises out of control in 2021, that could change the policy outlook very quickly.
The Brexit deal reached ahead of the holidays reduces a layer of macro uncertainty, likely to boost sentiment on the U.K. and Sterling in the short-term.
But it looks like the deal will raise the difficulties of doing business for U.K. companies, which could limit any economic gains the new found certainty may bring.
Overall, the euro and Sterling are currencies to watch for strong gains if the Brexit transition goes smoothly.
More U.S.-China trade tensions after Biden?
Yes, it’s likely the trade relationship will not thaw out right after Biden’s inauguration, but it’s also likely that the U.S. will likely take a different approach to its relationship with China. Not in terms of remaining hawkish on its policies, but in terms of approach, moving from Trump’s motto of “America First” to a more diplomatic/pragmatic tone of working in partnership with other countries.
If so, this could reduce anxiety on trade over time, not just with China, but with the U.S.’s long-time partners who have soured in their relationship with the U.S. administration of the past few years. A scenario that is likely more risk-on than risk-off for financial assets.
Barring any major global surprises once again, it looks like AUD and NZD will likely outpace the safe havens for now, most notably against the U.S. Dollar and the Japanese yen. Going long AUD/USD, AUD/JPY, NZD/JPY, and NZD/USD have been the some of best performers since the pandemic peak, and will likely continue to out pace if Australia and New Zealand continues to contain the pandemic and recover at a relatively faster pace than the rest of the globe.
BTC hits $50K? $100K?
As with the rest of the financial markets, Bitcoin’s volatility picked up bigly in 2020! After a pandemic peak low of around $3,858, the gold standard crytpo not only rallied back beyond the pre-pandemic highs, but it eventually made new all time highs and beyond to trade right around $29,300 before the end of 2020. That’s a 7x return from the lows and a 4x return from the end of 2019!
Institutional buying seems to be behind the fourth quarter push, and with big players now taking big stakes, the odds are pretty low that a deep pullback is in the cards for crypto currencies like Bitcoin, Ethereum and others–again barring any major shocks to the financial system.
So, could BTC, ETH and others hit more all time highs in 2021? The odds are looking pretty good for now. And given the massive volatility that this new asset class brings, another 4x – 5x move is not out of the question. But also keep in mind that during the pandemic fire sale, Bitcoin dropped over 60% before bottoming out. Buyers beware and manage risk accordingly…and enjoy the ride!
That’s it for the markets…for now. Let’s take a look the other FX-Men wacky predictions that made the cut this year:
The world will see the first alien baby: Using his massive $TSLA gains to fund the dream, Elon Musk will go to Mars! And in true Elon fashion, he takes that success a step further by having another child on the Red Planet. The world’s first alien baby’s name will actually be “µi*≥# ∞6!-“, but Elon will call him “Flark Dent,” because, well, that’s what Elon does.
There will be a Broadway musical about Yellen: Lin-Manuel Miranda will write about Janet Yellen, the first woman to serve as the U.S. Fed Chairman and Treasury Secretary. Tracks will include “Yellen Not Vibin’,” “Say No to This (Rate Hike),” and “The Room Where Mnuchin’s Photo Op Happened.”
Another wacky year for sports. Tom Brady will lead the Buccaneers to a Super Bowl victory over the Chiefs, Manchester City will take the Champions League, the Tampa Bay Rays will make a stunning comeback to the World Series to win it all, and esports will be watched more than all of those events combined!
There ya have it, folks! These are some of our wacky, and completely ridiculous predictions for 2021, but we’re curious to find out what yours are. Please share in the comments section below!