Our currency outlook for 2021
Our FX outlook for 2021 is based on the assumption that global economic recovery extends into 2021 and 2022, boosted by the quick, mass deployment of vaccines. Such an environment should lift cyclical currencies relative to defensive ones.
Among defensive currencies, the overvalued US dollar should continue to weaken. Indeed, safe-haven demand for the US dollar could remain muted as economic recovery stimulates global risk appetite. And the rebound in the US growth is unlikely to be strong enough to provide the same level of support to the US dollar as in previous years. Our 12-month projection for the EUR/USD rate is USD1.26 compared with a rate of USD1.21 in early December 2020.
We think cyclical currencies are likely to perform best against the US dollar in 2021. Scandinavian currencies are especially attractive as they have the added advantage of being significantly undervalued. Other cyclical currencies such as the New Zealand, Australian and Canadian dollar are expected to perform well. We have a preference for the Australian dollar.
Sterling’s claim to be undervalued is highly dependent on the questionable assumption that the UK’s long-term growth potential will not be hindered significantly by Brexit. That said, the UK’s heavily services-reliant economy could rebound strongly in 2021. Overall, we see scope for sterling to match the performance of the euro against the US dollar, as long as a highly disruptive no-deal Brexit is avoided. Our central 12-month projection is USD1.40 per GBP compared with a rate of USD1.33 in early December 2020.
We see the defensive Japanese yen and Swiss franc as more attractive than the US dollar, with structurally low inflation in Japan and Switzerland making real rates more attractive than in the US. The yen’s significant undervaluation means we prefer it to the franc. Our 12-month forecasts for the USD/JPY and USD/CHF rates JPY100 and CHF0.89, respectively.
The Chinese renminbi has emerged stronger from the pandemic thanks to economic growth and interest rates differentials. Given the recent push from China to make the renminbi more market driven, we expect the currency to gradually appreciate towards CNY6.25 by end 2021 from about CNY6.54 in early December 2020, even if we do not expect any significant de-escalation in trade tensions with the US.
Global economic recovery, a weaker US dollar, higher oil price and a stronger renminbi should offer supportive external conditions for EM currencies. In Asia, our preference goes to the Korean won and the Singapore dollar given their sensitivity to improving global growth. Elsewhere, we like the oil-sensitive and undervalued Russian rubble, the Israeli shekel and the Polish zloty. In Latin America, we think the undervalued Mexican peso should do well in an environment propitious to EM currencies in general.
The prospect of a robust recovery in global growth has weighed on gold through reduced safe-haven demand. However, there are other, more important long-term drivers for gold, for example US real rates, which we expect to remain very low in 2021. In addition, jewellery demand, 30% of which comes from China, should rebound from very low levels. Official demand should also continue to support gold prices (although to a lesser degree than in 2018-2019) as the rationale for holding gold, notably for diversification purposes, remains intact. Overall, we expect gold prices to set new highs in 2021. Our central 12-month projection is for the price to rise to USD2,150 per troy ounce at the end of next year from about USD1,830 in early December 2020.