Currencies

The USD could still find intermittent demand during pockets of uncertainty given its status as a safe haven. Resurging COVID-19 infections leading to renewed targeted lockdowns as well as ongoing geopolitical uncertainties are risk factors that could lead to worries of global growth momentum stalling.

Nevertheless, the dollar softness is likely to persist over time in light of an eroding USD rate advantage (with the Fed likely to keeping policy rates on hold at low levels for longer), the sharp deterioration in twin deficits of the U.S. economy as well as the rebounding global growth on eventual containment of the pandemic.

In contrast, the EUR is expected to trend higher. The simultaneous and coordinated use of monetary and fiscal stimuli is a strong display of European Union (EU) solidarity. This should serve to stabilise market sentiment and support the economic recovery for EU and the EUR into 2021. In particular, the EUR 750 billion “Next Generation EU” recovery fund is a medium-term positive, allowing for some levels of central debt issuance, fiscal risk-sharing and grants to weaker nations in the fight against the pandemic. The EUR should also continue to draw support from fund inflows through debt issuance to mitigate unemployment risks in an Emergency (SURE) programme.

We also maintain a constructive outlook on GBP into 2021 with the U.K. and EU reaching an agreement on the trade agreement post Brexit. Ongoing trade negotiations with other nations are also potential positives in the medium-term. Meanwhile, the continuing policy accommodation and fiscal support can mitigate economic downside risks in the interim.

The JPY could appreciate modestly against the USD with uncertainties surrounding the sustainability of fiscal packages around the globe as well as challenges associated with vaccine development and distribution continuing to underpin demand for the safe haven yen. Meanwhile, the new Prime Minister Yoshihide Suga has signalled policy continuity for the domestic economy.