Credit Agricole

EUR: We remain constructive on the EUR in the wake of the EU recovery fund introduction, which should help minimise the break-up tail risks in the Eurozone and pave the way for the creation of a vast pool of AAA-rated assets that could attract flows from European investors returning home as well as foreign investors looking to diversify away from the USD in the coming months. We further note that any pivot at the ECB towards a more dovish stance in the coming months could be offset by a move in the same direction by the dovish Fed in the wake of the US presidential election. EUR/USD also looks undervalued relative to our long-term fair value gauges, which point to 1.2350 as the level at which the pair should be trading.

USD: We maintain a cautious USD outlook, taking into account the lingering risks to the US growth outlook from the Covid-19 pandemic and the potential prospect of less business-friendly policies if the Democrats gain control over the Presidency and Congress after the November elections. The Fed has pivoted towards average inflation targeting recently and could boost the size of its QE and lengthen the average duration of its portfolio, which, in turn, could encourage further diversification out of the USD and into other liquid proxies like the EUR. The biggest risk to that view remains a potential preservation of the status quo, eg, a re-election of President Donald Trump and the GOP remaining in charge of the Senate after the vote. This outcome could lead to fiscal expansion and aggressive protectionism, which could support the USD.

JPY: The uncertainty surrounding global growth and Japan’s reliance on fiscal rather than monetary policy to fight its Covid-19 downturn will support the JPY in the near term. US political uncertainty in the lead up to the US Presidential election, especially a potential further ramping up of US-China tensions, will provide the JPY with near-term support. As the global economy recovers from Covid-19 during 2021, gaps will open up again between Japan’s poor long-term growth performance and that of other G10 countries, which will weigh on the JPY. The return of multiple waves of Covid-19 are an upside risk for the JPY.

GBP: Lingering Brexit uncertainty as well as the impact of fresh containment measures in response to the second wave of Covid-19 continue to cloud the UK economic outlook. We expect the UK and the EU to reach a Brexit trade deal in the coming weeks while the BoE could delay the use of negative policy rates to mid-2021. This could help the GBP recover modestly into year-end vs the EUR and the GBP. Further out, the outlook could become more balanced again as the threat of BoE easing persists in 2021.

AUD: Australia’s response to Covid-19 has been exceptional among G10 countries and this is helping the AUD bounce back from the pandemic. China’s fast recovery from the virus and the US’s poor handling of Covid-19 has added to the AUD’s outperformance. Australia’s exposure to the relatively stronger economic recoveries from Covid- 19 in Asia will continue to support the AUD in 2021. A high level of domestic household debt is a risk for the AUD when fiscal support for the economy is wound back and loan repayment holidays end. US-China trade tensions are also a downside risk.

NZD: NZ’s strong performance in containing Covid-19, its aggressive fiscal stimulus and exposure to the relatively stronger economic recoveries in Asia and Australia will continue to see the NZD outperform. NZ’s heavy reliance on tourism and education exports and the closure of international borders likely well into 2021, as well as the RBNZ’s threat of implementing negative rates, will lead to some NZD underperformance relative to the AUD. US-China trade tensions are also a downside risk.

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