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FX Fundamental Breakdown - 18 Jan 2021

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We've covered what's happening for the major currencies in the coming weeks. Read on to see what we are looking for.

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Our outlook

There were many events last week that saw the USD being supported, asthe 1.9 trillion Biden Stimulus package, which is being referred to as the ‘American Rescue Plan’, saw equities fall and move assets back into the dollar. This also saw gold fall as the USD appreciated. Another event that affected the USD was the Retail Sales economic data, which came in at 489.75 billion, down from 491.08 billion from the previous month and the michigan consumer sentiment which was also below consensus. Seen as usually bearish for the USD, these events also indicate negative results for the equity market with sell offs showing appreciation for the USD. Another event that indicated bearish results for the USD was the EU's plans to reduce their reliance on the USD post-Trump administration in order to run an independent foreign policy. This will be an interesting event to watch out for, as the USD is set to continue long term depreciation, which brings into question which currency will take over as the global currency. Biden’s administration is likely to bring short term upside/choppiness to the USD, however, our long term bearish bias prevails. Next week's events to look out for include USD GDP data on Monday, and the Fed rate decision and FOMC press conference on Thursday.

During last week's events, the EUR saw decline as markets moved to safer currencies like the USD and JPY. As previously discussed, European council plans on reducing their reliance on the USD post-Trump administration. The EU council hopes that this move will ensure that they are less exposed to US sanctions. If all works out in favor of the EU council, this will prove to be very bullish for the EUR. Last week was looking very quiet for the EUR in relation to economic data, and likewise for the coming week with the only high impact event for the week being the EUR YoY GDP data coming on Friday.

During last week's events, the AUD fell significantly as risk off sentiments drove markets. With a forecast of 7.0%, the AUD retail sales came in at 7.1% which was slightly above expected forecast. However, this did not have a major impact on the AUD. Although the risk-off sentiment shows downside results for AUD, keep in mind the long term bullish market that the AUD is currently in. This is due to the mining trade and strong economic data coming from Australia which shows no signs of slowing. These sell offs and retracements also present opportunities for long term traders to trade at. An event to watch for in the coming week is the AUD Consumer Price Index on Wednesday.

Despite the risk sentiment, the Pound came in as the top performer for major currencies in the last week. Events that traders seem to be capitalising off include the updates on the Brexit trade agreement and the roll out of the Covid-19 vaccine. There were also some comments made in regard to negative runs being off the cards for the BoE, however, recent economic data from the UK has been disappointing as clearly, the UK's lockdown does not help their economic situation. The GBP is showing the same signs as other risk-on currencies for the upcoming week and might fall, which then presents similar opportunities for long-term traders. In the coming week, these events should give an improved reading for the UK’s economic situation. These include the GBP CPI data on Wednesday and the Markit Services PMI on Friday.

Being a safe haven currency, the JPY performed well within the last week with the risk-off sentiment. It was a quiet week on the economic calendar for Japan, but despite this, their economic data has not been pleasing in recent times. Also holding negative interest rates, this obviously does not seem appealing to long term value investors. Continued upside for the JPY in the coming weeks is expected, depending on risk sentiment. However, bias for long term Yen depreciation is still in place. To provide further insight into the future of Japan’s fiscal policy, the event to look out for is the BoJ Monetary Policy Meeting Minutes.

Fighting to hold its gains in the last week, the CAD succeeded, backed by oil as WTI Crude Oil continued to hold above the $50 mark. Being a commodity based currency, the CAD is anticipated to prevail over the next year, despite Biden’s Green fuel policy. While it was a quiet week for the CAD on the economic calendar, there are a few events in the coming week that are great indicators to look out for. These include the CPI Date on Wednesday, the BoC Rate Decision and monetary policy statement coming on Thursday and the Retail Sales Data on Friday.

Similar to the JPY, the CHF was a safe currency in the last week and performed well. While there were no high impact economic events within the last week, Switzerland has still had strong economic data within the last months. Likewise to the JPY, Switzerland has negative interest rates which means that the CHF is also not appealing to long term value investors. There are no high impact events in the coming week to note for CHF. As anticipation grows for the risk-on major currencies to appreciate throughout the next year while they battle for the top spot in replacing the USD as a global currency, our outlook for the CHF is depreciation. This leaves little to no room for currencies backed by negative interest rates to prosper.

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