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USD: A Cautious Beginning to the New Year

USD: Investors are returning from their year-end break to find that late 2020 trends have largely extended. These trends have rewarded overweight positions in equities (particularly tech) and commodities and underweight positions in bonds and cash (especially cash held in US dollars). Positioning is starting to look a little stretched, however, with cash positions now underweight for the first time since 2013 according to buyside surveys. And whilst there may be much Fear of Missing Out (FOMO) as investors break from the gates on the first major trading day of the New Year, we think a little caution is warranted ahead of one of the first major event risks of 2021 – tomorrow’s re-run of the Georgia Senate election. Whilst most analysts predict that Republicans hold onto the two seats in question, investors may want to see that result confirmed before pushing reflationary trades (and dollar weakness) much further. Any surprise win for the Democrats here could raise concern of greater regulatory oversight for the US tech sector and prompt some position adjustment in US equities.

CAD: has performed relatively firmly over the Christmas break, gaining around 1.5% since the 24th, to track its commodity cousins, the AUD and NZD fairly closely and out-perform its G7 peers. Firm commodity prices, risk appetite and the better than expected run of Canadian data reports ahead of the break have all helped lift the CAD—and extend the run lower in the USD to minor, new cycle lows today. The CAD rally does not look especially stretched from our point of view but we stress that the CAD does tend to wobble a little in the first quarter of the new calendar year. We expect any seasonal softness to remain limited to the 1.30 zone at the moment and we still rather feel that modest USD gains are a sell.

EUR: EUR/USD starts the year at its highs – unaffected by the broadening lockdowns across Europe as policymakers try to control the spread of the virus even as they race to roll out vaccines. Driving this EUR/USD strength, however, is broad dollar weakness and here we are especially impressed by the sharp drop in USD/CNY below 6.50 overnight. Inevitably some of these flows into Asia equities will be recycled into the EUR through FX intervention by Asian central banks – look out for December FX reserve figures from Korea and Taiwan this week. This should be a key trend for 2021, potentially taking EUR/USD through 1.25. For today, the focus in Europe will be manufacturing December PMIs which have been holding up better than expected.

GBP: Sterling is holding onto late December gains as investors take stock of the free trade deal – which largely matched low expectations. Being underweight UK equities since 2016 has largely paid off for investors and the broadening of UK lockdowns hardly makes a case for any re-rating right now. Yet we suspect the GBP recovery has a little further to run.

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