Economists at HSBC continue to favour the USD over the EUR and GBP in the year ahead as growth – both the pace and sustainability of the bounce back – will be the main determinant of FX fortunes.
“As certain aspects of uncertainty lift going into 2021 – the US elections, optimism about a potential COVID-19 vaccine – we believe FX will shift away from recent Risk On-Risk Off (RORO) behaviour to idiosyncratic drivers. However, interest rate differentials, one of the key traditional FX drivers, may be less useful in the months ahead compared to during the Global Financial Crisis (GFC) recovery. In our view, the most obvious candidate to drive FX performance in this ‘new normal’ is relative growth. Economies that can generate a faster and more durable recovery can also sustain a stronger currency.”
“Our economists expect the UK and the Eurozone to fare the worst among G10 economies, while the US sits in the middle. Against this backdrop, we continue to favour a divergent outlook for the USD in G10 currencies in 2021. The USD is likely to underperform the AUD and NZD, but outperform the EUR and GBP.”