FX Daily: Fear Of Missing Out In 21

United States Capitol building silhouette at sunrise

As the first major trading day of the new year kicks off, risk assets remain in favour. But we think caution is warranted ahead of tomorrow’s re-run of the Georgia Senate election.

USD: A cautious beginning to the New Year

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. For today then, expect DXY to stay soft in an 89.50-90.00 range, awaiting Georgia. (UDN)

EUR: Lockdowns have yet to take their toll

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. Expect EUR/USD to stay supported near 1.22. (FXE)

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