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Daily Currency Update

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More USD weakness ahead

USD: 2021 will be the year when FX markets will get back on track (after recent years of diversion via President Trump’s protectionism and the Covid-19 crisis) and forecast broad-based dollar weakness - by 5-10% against most currencies. There are two things central to that bearish dollar call. First, that policymakers provide sufficient fiscal and monetary policy support such that inflation expectations rise. Second, the Fed keeps policy rates on the floor such that US real interest rates stay very negative. This very loose US monetary setting, plus a reversal of the White House’s protectionist policies, should allow currencies in the Rest of the World to breathe again. Overall, USD is to further fade in 2021

CAD: CAD looks set to be a key beneficiary of the USD decline and global reflationary environment in 2021, thanks to a combination of relatively attractive real rate (we expect the BoC to stay put and inflation to stay below-target in 2021) and risk-adjusted carry. When adding a sustained recovery in crude prices, some scope for a CAD short squeeze and undemanding valuation, we expect USD/CAD to reach 1.25 in by 2Q21.

EUR: Despite no progress made on the issue of the EU budget, the Recovery fund and the Rule of Law clause in the virtual call of EU leaders yesterday, the effect on EUR has been limited as such an outcome did not come as a surprise. Investors are eyeing the Dec EU Summit as the resolution point. We are inclined to think a common solution will be eventually found (in line with the prior examples of EU disputes) taking away the hurdle for more EUR/USD upside in 2021, and noting the wider soft USD environment

GBP: Continues to tread water given no material announcement on the UK-EU trade negotiations. After the initial one-off positive adjustment to GBP in response to the deal, we expect GBP to plateau around in 2021 given (a) the uninspiring UK economic prospects and no normalization from BoE.

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