December 2020 - Monthly Economic Outlook

1 December 2020

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Gain an overview of the latest developments on the currency market and anticipate fluctuation risks pertaining to the US election, the Covid-19 crisis and Brexit.
 
EUR/USD
High: 1.2000 / Low: 1.1653 / Variation: +2.78%

November’s heightened levels of risk appetite help explain the euro’s rise, which turned into something of a breakaway as it climbed to the psychological threshold of 1.20 this week. Caution must be demonstrated however, as the ECB has repeatedly (and too often, since September) stated that it is closely monitoring changes in the EUR/USD rate. In the somewhat understated jargon used by central bankers, this means that it will not allow an excessive increase in the single currency that could harm European economic recovery.

With December upon us, the general focus will switch to central banks. The ECB is due to announce a new and sizeable monetary stimulus on 10 December. The consensus is that there will be an extension of the current asset repurchasing (or quantitative easing) programme, along with the introduction of even more promising conditions for bank refinancing, a tool favoured by the ECB, as it is an efficient way of increasing bank lending to households and companies.

For the Federal Reserve, two options are on the table. Either an increase in quantitative easing (QE) or the widespread deployment of the economic stimulus programmes first launched in March, which are due to expire on 31 December. Whatever the case may be, it is a safe bet that central banks will set the tone in the foreign exchange market in December, almost certainly continuing to stimulate risk appetite.

 

EUR/GBP
High: 0.9066 / Low: 0.8912 / Variation: -0.78%

Forex market operators have demonstrated considerable indecisiveness as a result of Brexit-related uncertainties. The new key deadline has shifted to 10 December, the date for the last European Council of the year, which is primarily expected to raise questions over post-Brexit trade relations between the EU and the United Kingdom. If there is to be an agreement between the two parties prior to 31 December 2020, this is definitely the most opportune date for it to be approved by the EU’s heads of state or government.

While visibility over Brexit remains minimal, it has already become clear that the United Kingdom will be one of the developed economies to be worst hit by the pandemic. According to projections, GDP should fall by 11.3% in 2020 (an unprecedented drop over the past 300 years) and it will take until the fourth quarter of 2022 before GDP returns to its pre-crisis level. A long period of uncertainty beckons for the UK, the result of which could be a long depreciation phase for the country’s currency.

 

EUR/JPY
High: 125.13 / Low: 122.11 / Variation: +2.38%

November saw strong fluctuations in the euro-yen currency pair (EUR/JPY), within a range of more than 300 pips. Much of this renewed volatility is explained by the many news stories breaking over the course of last month, starting with the US presidential election, the reinstatement of lockdown measures in many countries and multiple vaccine announcements.

In terms of monetary policy, the Bank of Japan is maintaining its course through quantitative easing measures that seem set to continue for some time. Since the beginning of the pandemic, the central bank has bought 75% of all Japanese sovereign debt, a world record. Note that the country’s economy remains in the recovery phase, with GDP expected to contract by 5.5% over the fiscal year until March 2021. However, from the second quarter of next year, Japan’s economy should benefit from China’s recovery, therefore remaining more likely to return to growth faster than the eurozone.

 

EUR/CHF
High: 1.0870 / Low: 1.0700 / Variation: +1.02%

The euro regained ground against the Swiss franc in November, primarily due to the improved economic outlook for 2021 following encouraging Covid-19 vaccine announcements. It should be added that the US presidential transition phase is progressing rather well, despite a number of hiccups. Contrary to the market’s worst fears, the election results have not been seriously challenged. This has enabled the forex market to recuperate some risk appetite.

For the Swiss National Bank, the Federal Council of the Swiss Confederation’s renewal of its management board for six years is a sign of continuity in monetary policy. In other words, the future will see a continuation of repeated currency market interventions designed to limit the strength of the Swiss franc.

 

EUR/CAD
High: 1.5580 / Low: 1.5409 / Variation: -0.60%

Chequered fluctuations were observed in the euro-Canadian dollar (EUR/CAD) exchange rate over the month of November. In the medium term, the Canadian dollar remains propped up by a very strong recovery in commodities, particularly when it comes to energy, reflecting investors’ optimistic expectations with regard to growth prospects in 2021. On a month-on-month basis, Brent rose by more than 17% and WTI by more than 16%.

Domestically, it should be noted that the Canadian economy continues to be supported by repeated central bank interventions. By the end of the year, it is estimated that the Bank of Canada will hold nearly 56% of the country’s total sovereign bond stocks, a record high that should provide Canada with very favourable conditions for self-financing, thereby ensuring a return to growth next year.

 

EUR/AUD
High: 1.6632 / Low: 1.6192 / Variation: -2.64%

The euro collapsed against the Australian dollar in November, with a fall of 2.64%. The Australian currency’s rise may be explained by a number of factors. Chief among these, foreign exchange market operators’ expectations that Australia should be a major beneficiary of China’s economic recovery by next year, resulting from close trade relations.

Secondly, it seems that FX players are reassured by the Australian central bank’s (RBA) continued pursuit of a particularly accommodating approach. In the minutes from its November meeting, the RBA very clearly stated that it will once again increase its stimulus measures for the country’s economy, most likely through an increase in its quantitative easing programme.

 

EUR/CNH
High: 7.8586 / Low: 7.7518 / Variation: +0.86%

Regarding the EUR/CNH pair, the month of November has been synonymous with a slight appreciation phase in favour of the euro (+0.86%). This brought an end to the euro’s nearly three-month plunge against the CNH from August, mainly reflecting the economic differential between the eurozone and China.

This differential persists as China is expected to be the only major economy to experience positive growth this year, while the eurozone sinks further into a contraction phase in the fourth quarter. That said, it would appear that the Chinese authorities have now put an emphasis on stability, with a EUR/CNH price zone between 7.75 and 7.85 seeming comfortable for Beijing.

 
Economic calendar:
 
DATE CURRENCY EVENT
02/12  USD 

ADP Nonfarm Employment Report (November)

04/12  USD

US employment situation summary (November)

 08/12 EUR

ZEW Economic Sentiment Index in Germany (December)  

09/12 CAD

Central bank meeting

 10/12 USD

US Food and Drug Administration (FDA) set to review the application for the emergency use of the vaccine produced by Pfizer

10/12 EUR ECB meeting
10-11/12 EUR European Council on Brexit
16/12 USD Fed meeting
17/12 CHF Swiss National Bank meeting
18/12 EUR Business Climate Index, Germany

 

 

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