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Reflecting On Foreign Exchange In 2020 & Looking Forward To The Year Ahead

Written by in News on January 25, 2021

Reflecting On Foreign Exchange In 2020 & Looking Forward To The Year Ahead

As we move into 2021 and leave the past year behind, we’re reflecting upon an especially unpredictable time. While the world of foreign exchange is notoriously volatile, 2020 proved to be unique in many ways. Below we have compiled a series of reflections on the currency market and FX in general over the course of the past year. In addition, we’ve outlined some predictions for the new calendar year.

Shift Connect 2020 FX Market Reflections

What a year! Who still remembers the start of 2020, when the global economy was discussing the eurozone’s Japanification, trade wars, and how to revive or extend the very mature economic cycle?

In January, the COVID-19 pandemic was still a regional virus, and surely none of us could have predicted that it would impact the globe so acutely and end up becoming the driver of such a turbulent year. As the wild year slowly but surely has drawn to a close, we look back on 2020 and see a global economy that had entered the pandemic on a much weaker footing than most previous economic crises and ended up in the most severe economic slump in almost a century.

Next to the economic fallout of the crisis, 2020 has also been a postmark for other remarkable developments. Just think of the end of austerity-dominated fiscal policies in the eurozone, unprecedented forms of European solidarity, Donald Trump becoming the fourth US president since the second world war who didn't win a second term, or the Asian-Pacific trade agreement, creating the world’s largest trading bloc without either the US or Europe. In any case, it has been a very remarkable year in all aspects. Historical in more ways than one.

Looking ahead, finally, we can spot some silver linings. If the next US administration really takes a more cooperative approach to global trade too, risks to the economic outlook could finally, and for the first time in months, be tilted to the upside. However, for many European countries and probably also the US, things will first get worse before they get better. The beginning of the winter months has been characterized by more severe lockdowns, requiring a lot of stamina from people and also more fiscal and monetary support from governments and central banks.

Now, a look forward.

2021 Predictions

In 2021, exchange rates are likely to be driven by how quickly market confidence builds in a, hopefully, post-pandemic global recovery. This year has been a wild ride for FX markets, with most major currencies returning to pre-pandemic levels by years end

It is clear that investors are being encouraged to move out along the credit curve and out of the dollar, too. Aggressive fiscal and monetary policy support packages have certainly helped here.

We predict that 2021 will be the year that FX markets, diverted by two years of President Trump’s protectionism and then by one year (and counting) of the COVID-19 crisis, get back on track as the gravitational pull of the dollar fades. We forecast the dollar to broadly decline in 2021 - generally by 5-10% against most currencies.

It will not be a straight-line sell-off in the dollar, the legacy of COVID-19 in both Europe and the US will see to that. And key risks to our bullish call on global currency pairs stem from the world economy failing to exit stall speed or the Fed taking away the punchbowl too early.

With vaccines being rolled out in the first half of 2021, the hope is that most economies can return to a new normal. If the next US administration really takes a more cooperative approach to global trade too, risks to the economic outlook could finally, and for the first time in months, be tilted to the upside.

If there’s one thing we know for sure, it’s that we can expect more unpredictability and volatility in the year ahead.

Financially speaking, forward-looking decisions are of the utmost importance and risk management has never been more imperative. If you’d like to chat about your risk management options in the face of currency fluctuations, get in touch! We’d love to help you gain a tool belt of tactics and solutions to protect yourself from loss.

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