New Year brings a weak US dollar and chaos in Washington DC with Capitol Hill reduced to a riot zone and President Trump impeached for a second time.
In unprecedented scenes last week Donald Trump supporters managed to force their way into the Capitol building staging a shambolic insurrection trying to disrupt the democratic process.
This pushed the Democrats and even ten Republicans to vote to again impeach President Trump when Vice President Mike Pence refused to use the 25th Amendment to remove the president himself.
Trump was charged with “incitement of insurrection” and the impeachment vote in the senate will most likely take place after Trump is out of office with the apparent goal of ensuring Trump can’t run for high-office again in the future.
It then seems somehow unusual that these depressing events may have signaled a pause to the US Dollar doom and gloom that has been the market consensus since the middle of last year.
The US dollar index that was down about 10 per cent from mid-March has jumped back up above 90. However, most banks and forecasters expect the downwards trend to resume, with some predicting that the greenback could fall 20 per cent or more in 2021.
Looking at both the Aussie dollar and the pound sterling since early 2018 against the US dollar, after big drops for both they are back to where they started, sterling having dropped 15 per cent and the Aussie dollar 25 per cent in the meantime.
British Pound on a High
The pound has hit its highest level vs the US dollar since April 2018 against the US dollar on the final day of 2020 and continued higher, as markets remain optimistic after the UK parliament’s approval of Britain’s post-Brexit trade deal.
This proves currency analysts correct who had predicted the currency could trade above $1.35 if the EU and UK managed to do a deal, a much better result for Sterling than the predictions for a no-deal outcome, where the pound was seen dropping to about $1.25.
Australian dollar hits US78c
Last week the Australian dollar climbed past US78c for the first time in 3 years, with surging commodity prices underscoring the crucial role iron ore prices are playing in supporting the valuation of the currency.
Further, if we look only at the last nine months the Aussie has surged over 40 percent after hitting a low of US55 cents in March.
Overall, it was a very good 2020 for the Australian dollar, with an 11 percent surge versus the US dollar, 9 percent rise against the pound, a smaller 2 percent up against the Kiwi dollar and steady to the euro.
Many economists are predicting a rise to US80c over the next 12 months, helped by rising commodity prices and a cyclical decline in the US dollar.
However, Bloomberg reports that the Aussie may have risen too far too fast and could soon reverse course AUD may drop back quickly to 74 U.S. cents.
It was a very good 2020 for the Euro, with an 10 percent surge versus the US dollar with the rate rising to 1.2327 last week. In 2021, the main question for EUR/USD is whether it will be able to settle above 2018 highs at 1.2500.
TD Bank are pessimistic on the loonie’s outlook telling Bloomberg TV on Jan 10 they see the EUR/USD to push below 1.2000.
Other more optimistic forecasters, believing the ECB’s support of the eurozone economy is working, suggest EUR/USD will test new highs at the very beginning of 2021. If this early test holds they believe EUR/USD will have a good chance of a strong upside trend against the U.S. dollar this year.
The Canadian dollar has started the new year robustly with CAD/USD hitting three-year highs against the greenback, spurred on further by expectations of further U.S. dollar weakness after Joe Biden revealed his 1.9 trillion dollar stimulus plans.
Overall, it was a poor to mixed 2020 for the Singapore dollar, with a 9 percent drop against the euro and 8 percent versus the Australian dollar, but small gains (2 percent) against the US dollar and steady to the pound.
US Dollar gloom
The US dollar index (USDX) has been slipping steadily since its flight to safety highs back in March with the USDX falling below 90 for the first time since Jan 2018. However the possible return of inflation, stemming from Joe Biden’s stimulus plans, has given the US dollar back some strength.
This may only be temporary, and the USD will again find itself out of favour (as a safe-haven currency) when the world’s economies make a very much hoped-for recovery from the pandemic.
Some economists forecast that the rise of China and the yuan as an alternative reserve currency inevitably foreshadows the dollar’s fall.
Of course, incoming president Joe Biden still has time to repair some of Trump’s geopolitical damage by recommitting to multilateralism.
Realistically, China and the renminbi still have a long way to go to improve the convertibility of the yuan and reassure foreign investors. Arresting opposition politicians and seizing the bank accounts of political dissidents, as the Hong Kong government recently did, will certainly not encourage faster take-up of the renminbi.
Bitcoin last week reached an all-time high, touching a value of US$42,000, this was more than double the US$20,000 peak of the 2017-18 boom. Since then it has dropped 21 percent to US$33,000 before recouping much of its loses to again approach US$40,000. The markets can’t seem to decide if the value has become too frothy.
Mexico Peso Strength
The peso has remained strong against the US dollar with USDMXN consistently below 20.
Cash remittances to Central & South America have defied predictions of a large COVID related drop. The World Bank’s predicted Cash transfers from immigrants in the U.S. to family in Latin America would plummet 20% due to the pandemic. However with the US dollar shrinking, remittances have remained strong with the level of money being sent roughly equal to 2019.
Outlook for 2021
As last year 2021 will likely bring continued volatility in the currency markets
The market’s attention will be focused on the fate of the U.S. dollar which may find itself under more pressure if the Fed continues to print money while the world economy recovers from the blow dealt by the pandemic.
Commodity-related currencies like Australian dollar and Canadian dollar may enjoy more support if demand for commodities continues to grow together with the economy.
It will be very interesting to see whether the British pound will be able to continue its upside move after Britain successfully negotiated a trade deal with the EU.
For the euro, it may be another year of strength against the US dollar despite the current problems of the European economy.
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