In the UK, 2.3 million people have received at least one dose of an approved coronavirus vaccine. Compared with a population of 66M or so, and with 3.12M people already having had the virus, that number may seem small. However, the speed of vaccination, particularly keeping in mind that it so far meets the Prime Minister’s own ambitious target is providing an element of support to the UK Pound. It is a long way ahead to economic recovery and the rhetoric remains tilted towards tightening, not loosening measures, however, GBP was optimistic yesterday that the UK’s vaccination efforts are bringing that point closer than it otherwise might have be. Although the domestic outlook may be bleak in the short run, there are movements afoot in the markets that should give us hope of a brighter spring and still yet warmer summer.
Deemed overplayed at the end of last year, the so-called ‘reflation trade’ was losing conviction. This trading pattern that dominated the market attempted to profit from economic normalisation and the expectation that inflation would return to the underlying economy as the health crisis proved more manageable and huge monetary and fiscal support remained in place. With yields still stubbornly low and global infections rising at the end of last year, it looked like the incumbent phase of optimism and reflation could stumble. However, 2021 has started on a more optimistic footing. Whilst by historical standards 10-year yields are still remarkably low, the falling price of US treasury is pushing financial conditions back towards normality. The equity market remains solid with commodity prices continuing to find support. What’s more important is that economic forecasts still point towards recovery in Q2. All of these facts have added conviction to the flagging idea of reflation and normalisation and paints a rosier financial picture of the global economy.
2020 was a year to forget for many and the global economy lost approximately 5% of its annual output. Much of the pain although staved off by fiscal and monetary action has already been produced and felt. Economic activity levels are forecasted to restore and produce additional growth in 2021. We have recently spoken about these indicators and the importance for a smooth transfer of power to foster further progress on these trends. In the longer run, this continues to spell USD weakness that without or even in spite of ECB intervention could see EURUSD retrace the steps it took early on in the millennium, higher into the 1.20s. Commodity currencies should see solid demand into Q2/3 ‘21 with NOK, SEK and AUD the expected out-performers. South American currencies too are expected to benefit from the weaker US Dollar and more robust international aggregate demand.
Discussion and Analysis by Charles Porter
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