After a turbulent 2020, the impact of coronavirus in 2021 can be divided into four different periods with distinct reactions in markets, according to FXStreet’s Analyst Yohay Elam. The virus will likely outweigh the vaccine in early 2021, boosting the dollar, while a higher immunization availability in the boreal spring could improve sentiment. In the summer, traders may complain about modest volatility before autumn brings new action – herd immunity would result in inflation and prospects of Fed rate hikes.
See – Equities to continue marching forward in 2021 – Danske Bank
Key quotes
“COVID-19 is set to rage early in the year, especially in developed countries in the northern hemisphere. Fears of coronavirus variants – such as the one identified in Britain – are set to stoke fears. Another source of concern remains the slow pace of vaccination. The dark winter is set to weigh on investors’ mood, boosting the safe-haven dollar. The pound could be pounded – also as enthusiasm from reaching a Brexit deal would fade.”
“Vaccine approval and especially production will likely blossom in the spring. Moreover, countries that have struggled early on – due to cold storage requirements or lack of experience with large projects – will have ramped up operations. After a mostly dim first quarter, there is room for market gains in the second one. In this scenario, the safe-haven dollar could come under pressure. The euro would be a significant beneficiary.”
“2021 could see a blessed return to beaches and some tranquility in the financial world. If there are no nasty surprises, the world will return to 80% normality but most other activities could go on with diminishing mask-wearing. For the dollar, that could result in some stability as well, especially against European majors, the euro and the pound. The greenback could lose ground to the Australian and New Zealand dollars. Higher demand from the US and Europe could boost these antipodean currencies.”
“By the fourth quarter of 2021, the world may reach herd immunity against SARS-Cov-2. However, perhaps a new strain or mutation would emerge. Overall, even in this mutation scenario, there are reasons to be hopeful. Inflation, which was written off in 2020, may reemerge as a theme in 2021 – with rate hikes from the Federal Reserve becoming a real option for 2022. In this scenario, the dollar may rise in response to defeating the virus, a paradigm shift. The biggest loser would be the euro, as the European Central Bank has a long way to go from its negative rates. Another laggard would be the pound, still struggling with Brexit. On the flip side, commodity prices will likely rise in this inflationary scenario, supporting countries that export them. The aussie, kiwi and the Canadian dollar could put up a fight against the greenback if their central banks follow the Fed in signaling a readiness to raise rates.”
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