While 2020 did not end yet, investors already look at the next year and what the prospects are for the world economy. Global trade volumes are set to rebound, and so the economic growth should be back on track.
However, there is one condition – the COVID-19 tragedy must end. The recent developments in the fight against the pandemic offer encouraging signs for next year. While a vaccine is still far away, at least investors have a time horizon for the possible rollout, and so the economic calculations are easier to make.
Weaker USD Remains the 2021 Theme
Most forecasters see a weaker USD for the year ahead. While 2020 showed that the financial system still depends on the USD, an improvement in the economic growth prospects should send the USD lower.
The pandemic brought with it some important changes on the USD front. First, the Fed changed its optic of how it looks at inflation. Up until the Jackson Hole Symposium in August, the Fed looked at the PCE or Personal Consumption Expenditure at the 2% level as its definition of inflation. However, this definition changed with the introduction of Average Inflation Targeting around the 2% level.
The Fed could not have picked a better timing for the shift. Because of the pandemic, investors’ attention shifted from what the Fed signaled – lower monetary conditions for longer. From that moment on, the USD had a hard time gaining against other G10 currencies.
As such, with one month before the end of the year, the EURUSD trades at 1.19, the GBPUSD at 1.33, and AUDUSD at 0.73 – similar levels with the ones during the summer.
The world’s economy already recovered some of the 2020 losses. For instance, the Bank of England announced today that the United Kingdom’s economy recovered about two-thirds of what it lost during the pandemic.
This was possible due to a lower USD. Because the world’s trade is mostly denominated in USD, a lower USD fosters growth.
It does not mean that the USD will not rise in the future. In fact, it may also be possible that the USD will rise in value before it falls.
The explanation for that comes from the macro implications of the Fed’s decision and the effects the pandemic has on global growth. Until the changes make their way into the economy, the USD may still deviate from the downtrend.