The US dollar ends 2020 in a downtrend momentum against major currencies as investors move away from the safety of the greenback, betting on the global economic recovery in 2021 and the continued US fiscal and monetary policies.
The DXY-dollar index against a basket of six major currencies stood at 89.60 on Thursday, having hit its lowest since April 2018. The Euro trades near $1.23 while Pound Sterling advances near $1.3650, hitting their highest levels in 2.5 years against the US dollar, gaining support after Britain and European Union reached a post-Brexit trade deal agreement on Dec.24.
Furthermore, the Euro currency receives more demand vs dollar, since the Eurozone economy runs a huge current account surplus, thanks to exports of Germany and other industrial EU countries, while the US economy has a 12-year record current account deficit which causes further weakness to US dollar.
The greenback’s devaluation continued this week after the US President Donald Trump signed the well-expected $900 billion coronavirus aid package and spending bill on Sunday, to help reduce the damage of the pandemic in the world’s largest economy.
The fresh US stimulus bills are dollar-negative catalysts since they grow the nation’s budget deficit, increase the inflationary pressure in the economy (higher commodity prices), resulting in a real dilution of greenback’s purchasing value.
Safe havens under pressure:
The “safe-haven” currencies US dollar, Japanese Yen, and Swiss Franc have been under pressure against riskier currencies such as the Euro, Pound Sterling, and the dollars of Canada, Australia, and New Zealand in the second half of 2020.
The combination of massive fiscal and monetary policies around the world, the approval of the US stimulus bill, the start of mass vaccination programs in Europe and the USA, the relief over the well-awaited Brexit deal have bolstered risk appetite sentiment and created a positive backdrop for riskier currencies and global equities going into 2021.
The trade-sensitive Canadian, Australian, New Zealand dollars, and Asian currencies have climbed to the highest level in 2 years against the greenback amid the hopes that the rollout of Covid vaccines would end the widespread lockdowns and bring an economic normalisation next year.
Hence, the commodity-sensitive Mexican Peso, Norwegian Krone, and Russian Rubble hit yearly highs against the US dollar amid the tremendous rally in the commodity sector led by Crude oil and industrial metals (Copper, Iron Ore).
The trade & commodity-sensitive currencies are considered barometers of the risk appetite sentiment among market participants because of their trade ties with China and global commerce.
2021 US dollar Outlook:
The weaker demand for the US dollar is expected to remain in 2021 if the Federal Reserve keeps its loose monetary policy and interest rates near zero. Also, the new elected President Joe Biden is expected to push more economic support measures (extends current fiscal packages) since the second wave of pandemic and the resumption of social restrictions have become a real threat to the US economy.
The UK assets opened the week with significant losses on concerns over a fast-spreading coronavirus strain in the country and little progress on a post-Brexit trade deal.
The FTSE 100 Index tumbled as much as 3% on Monday as UK travel, airline, and retail shares were among the worst hit. Pound Sterling lost more than 2% against major currencies, the biggest drop since October, as investors moved to more safe-haven currencies.
The new variant that emerged in southeast England in September, is causing concerns as it is reported to be as 70% more transmissible than other strains and may be contributing to a spike in cases in the country, However, health experts said that Pfizer’s and Moderna’s vaccines would likely be effective against the new variant.
Prime Minister Boris Johnson announced emergency lockdowns in London and other regions over Christmas to curb the spread of the new strain, while several countries banned flights and suspended rail links with the UK.
The uncertainty about the new variant, together with the resumed lockdowns and travel bans have dampened the mood for UK economic prospects, as there is a growing fear that the virus situation will remain on course at least through Q1 2021.
As we are leaving behind a volatile year in the financial markets, we expect that the current uptrend price momentum in the commodity sector will continue throughout most of 2021.
We remain optimistic about the overall commodity market picture for the next year and we see another 10%-20% upside from the current price levels as the global economy comes back online, and “cyclical” sectors will benefit from a post-pandemic reopening.
The broader rally in the growth-led commodity sectors such as energies and industrial metals could be supported from the global economic growth after the pandemic, driven by an effective rollout of Covid-19 vaccines around the world, the continued fiscal and monetary relief stimulus to help stem market collapse, and the rebound in the global manufacturing and construction activity.
The vaccination of at least 50% of the global population until May 2021, could help bring a conclusion to the deadly pandemic and reopen the global economy, increasing the demand for commodity products not only in Asia but also in Europe and North America for manufacturing and construction usage.
China, as the world’s biggest commodity consumer (50% of the global demand), was the first country that exited from the Covid-19 crisis and this helped them recover quicker than the rest of the world. The country will see its economic growth rates rebounding above pre-pandemic levels in 2021 amid the low rate of virus cases in the country and the unprecedented infrastructure stimulus from the Chinese government, benefiting the commodity sectors.
The commodity market witnessed a roller-coaster ride in 2020
What goes up must come down and then usually goes back up again, at least in the case of the commodity prices in 2020.
The COVID-19 pandemic has plunged the global economy into its deepest recession since World War II, causing huge losses (more than 50%) in the prices of the commodities. The sector experienced the worst demand shock (-30% y-y) in their history amid the impact on their demand from the social lockdowns to contain the spread of the virus.
However, the commodity prices have since rebounded with surprising strength, recovering all the pandemic-led damages, even as Covid-19 cases continue to soar in Europe and the USA.
Industrial Metals: Bullish outlook for 2021
- 12-month forecast for Copper prices to average near $4 per pound, up 10% from the current levels.
- It is highly probable that the prices of Copper will retest the existing record highs of $4.60 in the period Q4 2021-Q1 2022. In the case of a stronger-than-expected global economic recovery, it may rise 30% from its current levels.
We believe that the industrial metals will continue their reopening-led rally into 2021 amid the hopes for a vaccine-related global economic recovery, the robust industrial demand from China, and the massive “green” investments.
The prices of the base metals showed impressive resilience to the pandemic, outperforming everybody’s expectations during the second half of 2020, and rising above their pre-pandemic levels. Copper prices climbed at $3.60 per pound at mid-December, hitting their highest since 2013, the Aluminium prices surpassed the psychological level of $2.000 per tonne, while Iron ore has been on a stellar run amid robust Chinese demand and supply concerns over the recent trade tension between China and Australia (possible tariffs on iron ore exports).
“Doctor” Copper is widely traded as a proxy for global economic health since its demand depends on the global growth rates and the construction-industrial activity. The usage of Copper and Aluminium in automobiles and constructions has taken off in the last decade, thanks to their good conduct of electricity, recyclability, and lightweight.
Industrial metals could also benefit from climate technology developments in 2021. Politicians including the European Union leaders and the new President of the USA Joe Baiden have promised massive “green” investments to expand the renewable energy capacity and to reduce carbon emissions. Copper and Aluminium will see their demand skyrocket since they are key elements to some climate technologies such as electric vehicles and their batteries, wind turbines, and solar panels.
Finally, the growing supply risks could act as a major bullish price driver in 2021, as a structural underinvestment in copper mines is seen in the last decade, caused by the low prices and lack of cheap liquidity amid the financial recession. The supply risk could deteriorate if we combine the low Copper stockpiles around the world and the frequent supply disruptions from major mines in Chile and South America amid labor strikes.
Crude oil: Bullish outlook for 2021
- 12-month forecast for WTI and Brent crude oil prices to trade between $50-$55 and $55-$60 per barrel respectively, up by 10%-15% from the current levels.
- It is highly probable the WTI and Brent crude oil prices to retest the pre-pandemic levels of $60 and $70 per barrel respectively at the Q4 2021-Q1 2022 in case of geopolitical risk premium, up 25% from the current levels.
We believe that the crude oil prices will continue their upward momentum into 2021. Brent crude oil price moved back above $50 per barrel in mid-December 2020, for the first time since the start of the pandemic, while the WTI crude climbed at $48 per barrel, recovering most of their pandemic-led losses in Q2.
The demand and supply dynamics in the energy markets will play a significant role for the crude oil prices next year. The bullish price outlook will be supported by a limited increase in crude oil supply from OPEC and its allies led by Russia, and by the growing optimism that the start of the COVID-19 vaccine rollout will drive a recovery in the global fuel demand in 2021.
Energy prices will also benefit from the rebound in the economic activity in China and other Asian industrial countries after the pandemic, which consumes in total more than 30% of the global oil supply.
The progress with the mass Covid-19 vaccinations in 2021 will be a bullish event for oil prices as it will put the global economy on a path to sustained recovery, affecting the oil demand in the second half of next year.
With vaccines on the horizon, we expect a significant rebound in the travel and transportation activity around the world which has been restricted due the virus outbreak. People will resume traveling with planes, ships, cars, and trains for business and entertainment in the second half of 2021 propelling a robust recovery in the demand for jet, maritime, and gasoline fuels.
A weaker US dollar will be another positive catalyst for oil prices in 2021, as it is the de-facto currency accepted for global trade (most contracts priced in US dollars). The greenback has slipped to 2.5-year lows against most currencies (DXY-dollar index fell below 90), making the dollar-denominated petroleum products more attractive to energy importers with foreign currencies.
OPEC and its de-facto leader Saudi Arabia are major influencers for oil prices as they always manage to avoid large surpluses or deficits in the oil market. Therefore, the willingness of Saudi Arabia and its non-OPEC allies (led by Russia) to keep their crude production at low levels amid the higher supply from Libya and US shale producers and until the full recovery of the global demand in 2021-2022, will be another bullish catalyst for the oil prices in the long term.
The coronavirus-driven oil price crash combined with the market shift towards renewable energy investments, had forced the shale oil drilling companies to cut production and delay investments in offshore projects, creating the risk for a supply deficit in the long run, which is certainly bullish for energy prices.
On the negative side, we expect that the current rise of Covid-19 infections will continue damaging global demand growth. With virus cases surging to record highs across Europe and the USA, they have announced new lockdowns and travel restrictions to curb the spread, weighing on near-term gasoline and jet fuel consumption.
We believe that the current vaccine-led rally in the commodity sector will be the first leg of a structural bull market amid their improved fundamentals. Therefore, we expect the prices of the energies and industrial metals to go higher by another 10%-20% in 2021 from their current levels, while every price correction will become a buying opportunity for the investors.
Bitcoin, which is the flagship cryptocurrency broke above the psychological level of $20.000 on Wednesday for the first time in history. The upside momentum continued also during Thursday’s European trading hours where the price hit a new record high of $23.700.
The pioneer digital currency price has surged by more than 100% since the September lows of $10.000 amid robust demand based on its unique crypto characteristics and the continuing devaluation of the world’s major fiat currencies (especially the US dollar).
Positive long-term fundamentals
The ballistic-style rally was supported by Bitcoin’s positive long-term fundamentals such as its scarcity (the total supply of bitcoins that will ever be “mined” is capped at 21 million) and the devaluation of the US dollar amid the massive monetary policies by the Federal Reserve and other Central banks around the world.
The portfolio managers have started using Bitcoins to diversify-hedge their investment portfolios against market risks and inflation, instead of Gold and inflation-linked Treasuries-Bonds. Bitcoin acts as a “store of value” asset and it is ideal for hedging some of the monetary and fiscal risks.
Hence, the crypto market has seen strong demand from institutional investors who invest billions into digital assets and blockchain technology. Many traditional banks and asset houses such as BBVA in Spain and Fidelity will start using bitcoins in their financial operations. Also, the S&P Dow Jones Indices recently announced plans to launch crypto indices in 2021, while Cboe has tapped New York-based trading software firm Coinroutes’ crypto market data capabilities.
The recent development in the digital markets provides further evidence that the crypto market is transforming from a retail place for speculation into a sophisticated and tech-savvy part of a global financial industry.
Optimism over COVID-19 vaccine developments led investors to rotate their funds into the growth-related energy market, sending the prices of Brent and WTI crude oil contracts to 8-month highs.
Brent crude oil price moved back above $51 per barrel for the first time since the start of the pandemic in early March, while the WTI crude hovers at $48 per barrel.
The rally in oil prices has been supported by the growing optimism that the start of the COVID-19 vaccine rollout will drive a recovery in the global demand and consumption of petroleum products in 2021. The bullish trend has also backed from the willingness of OPEC and its non-OPEC allies (led by Russia) to keep their crude production at low levels until the full recovery of the global demand in 2021-2022.
The UK and USA were the first countries in the world to approve and roll-out this week the COVID-19 vaccine developed by Pfizer Inc and German partner BioNTech SE. Both countries have already started vaccinating thousands of health-essential workers and elderly people. Health officials have said that the vaccinations for groups that are not at a high risk (people aged under 65) expect to take place in the spring of 2021, to achieve herd immunity.
The energy sector receives additional support and demand from the growth momentum from Asia since the economic and industrial activity in China has already recovered to pre-Covid levels.
Hence, the massive fiscal and monetary stimulus around the world has also boosted energy prices. The US lawmakers are near to agree the $908 billion fiscal stimulus bill needed to prop up the US economic activity.
The European Central Bank-ECB together with the US Federal Reserve has promised to keep the interest rates at low for another 1-2 years, to support the global economies rebound from the financial and health recession.
Demand risks from fresh Covid-led lockdowns:
The recent vaccine-led rally in crude oil prices has lost some steam amid the resurgence of Covid-19 in the USA and Europe, affecting oil consumption in the near-term.
The rising virus infections has forced the local governments to apply tighter restrictions-lockdowns over the Christmas holidays to limit the spread of the virus.
Copper is a primary industrial metal and a leading indicator of global economic health, while Gold is the exact opposite, recognized as a traditional safe-haven asset and a store of value during economic recessions.
Vaccine euphoria has been the biggest driver for commodities in the final quarter of 2020, as the market expects that an effective vaccine could stimulate a global economic rebound next year.
Since the vaccine announcements last month, the commodity market has seen an investment rotation, with investors moving away from the safety of Gold and Silver and jumping into riskier metals such as Copper, Iron Ore, and Aluminium which could benefit from the recovery of the industrial activity.
The price of Copper climbed to the highest level since March 2013, touching 3.50 dollars per pound and getting support from the recovered industrial demand from China and supply disruptions from South America.
After touching a record high of 2.075 dollars per ounce on August 07, Gold has retreated by more than 10% on risk appetite and outflows from Gold ETFs. However, Gold holds the support level of 1.800 dollars per ounce, getting support from the lower US dollar and the risk for higher inflation from the massive fiscal and monetary policies.
Global equities rallied strongly at the start of the final trading week of 2020, as investors celebrate the Brexit trade agreement, the start of vaccinations in Europe, the positive news over AstraZeneca’s vaccine and the signing of the well-expected US Covid-19 relief package by President Trump.
US stimulus relief package:
Appetite for riskier assets increased this week after US. President Donald Trump signed a $900 billion coronavirus relief package into law on Sunday. Trump prevented a government shutdown late Sunday, extending the unemployment benefits into March for an estimated 14 million people in the USA. The new package includes a $600 direct payment to most individuals and adds $600 for every child.
President Trump suggested last week to veto the legislation demanding $2,000 direct payments instead of $600. The House voted Monday to increase the second round of federal direct payments to $2,000, leaving it up to the GOP-controlled Senate.
The stimulus-led market euphoria sent the industrial Dow Jones to close at fresh record highs of 30.400, up 0.7%, while S&P 500 and Nasdaq finished on Monday higher by 0.9% to 3.735 points and 0.7% to 12.900 points respectively, reaching new all-time highs as well.
Dow Jones and S&P 500 gained 6% and 15% respectively in 2020 recovering all Covid-led losses. However, it was the technology-focus Nasdaq Composite that outperformed the whole market, adding more than 45% in the same period as investors felt safe to position their funds into pandemic-winner tech names such as Netflix, Amazon, Zoom, and Apple.
Brexit trade deal and AstraZeneca’s vaccine:
Germany’s DAX index finished up 1.5% on Monday, erasing almost all pandemic-led losses, while France’s CAC rose 1.3%, on Brexit deal optimism, AstraZeneca vaccine news, and the start of mass vaccinations in Europe.
Britain’s FTSE 100 hit 8-month highs at 6.660 points on Tuesday after the drug maker AstraZeneca announced that its COVID-19 vaccine candidate is set to be granted emergency use approval from UK regulators this week. Hence, the company believes that its vaccine would be effective against a new variant of the virus that has helped drive a spike in cases in Britain.
European investors also cheered the long-awaited Brexit trade deal between the European Union and Britain last week. Euro and Pound Sterling currencies rose to 2 ½ year highs against the US dollar.
Equities in Asia were higher this morning, following the overnight gains on Wall Street. The Japanese index Nikkei 225 finished Tuesday’s session with 2% gains at 27.560 points, trading at levels not seen since 1990. South Korea’s Kospi finished the day at 2.820 points, up 0.50%, hitting fresh all-time highs, the Hang Seng gained 1% near yearly highs, while Australia’s ASX 200 rose 0.50%.
Crude oil gains:
Crude oil rose on Tuesday along with gains in global equities, over the growing optimism that the fresh US stimulus bill combined with the expectation for a global economic recovery in 2021 would increase the demand for petroleum products.
WTI and Brent crude prices added 1% yesterday, to $48 and $51 per barrel respectively erasing most of last week’s losses propelled from concerns over the new fast-spreading Covid variant in the UK.
Market outlook for 2021:
The market outlook for 2021 will remain bullish if the pandemic-damaged global economies will be supported by the ongoing massive monetary and fiscal stimulus, the low-interest rates, the weaker US dollar, and the successful mass vaccination of the global population which will allow economies to reopen after the devastating COVID
The European Central Bank (ECB) eased its policy once again on Thursday by increasing the overall size of its Pandemic Emergency Purchase Program (PEPP) by €500 billion to a total of €1,850 billion.
The main goal of the Central Bank is to help the Eurozone economy to manage the new implications of the second wave of the pandemic, while it also lowered its EU growth forecast and inflation rates for 2021.
The ECB surprised the market by extending the quantitative easing (QE) program by 9 months to March 2022, to keep government and corporate borrowing costs at record lows. The Central Bank decided to leave its benchmark interest rates unchanged at record lows of -0.50% while the main refinancing rate is unchanged at 0%.
In the post-meeting press conference, the ECB President Christine Lagarde said that the bank is monitoring the euro “very carefully”, while the increase in PEPP reflects fallout in economic activity.
Among other positive developments for the Eurozone, EU leaders in Brussels seemed close to unblocking a stalled 1.8 trillion euro package to help revive their pandemic-ravaged economies, after Poland and Hungary opposed the package.
When a Central Bank prints money, it usually causes a devaluation of its currency. However, this is not the case for Euro as investors see the ECB actions with a positive-supporting view. The common currency jumped by 50 points to a session high at $1.2150 after the ECB announcement on Thursday afternoon together with the US dollar weakness and declining Covid-19 infections in the EU.
The common currency received additional support on the downward pressure to the US dollar following the unexpected large surge in U.S Initial Weekly Jobless Claims. The number of Americans filing for unemployment-related benefits jumped to 853K during the week ending Dec. 5, up sharply from the previous month’s upwardly revised reading of 716K. This is the highest level since Sept. 19 and reflects the effects of recent pandemic-related restrictions or lockdowns in some States.
Brexit talks stalled:
The latest developments from the Brexit front have stalled the rise of the Euro beyond 1.2150, as the talks between European Commission President Ursula von der Leyen and U.K. Prime Minister Boris Johnson at the beginning of this week have ended without a breakthrough.
British Prime Minister Boris Johnson said on Thursday there was “a strong possibility” Britain and the EU would fail to strike a trade deal. The two teams of negotiators are continuing to meet ahead of the Sunday deadline, with analysts expecting little chance of success without fresh political compromise.
The global pandemic and the economic shutdowns have been devastating to the travel sectors in 2020, but optimism surrounding vaccine developments has boosted confidence of a smooth economic reopening in 2021.
50% of the global population is expected to receive a vaccine until next May, allowing consumers to travel and gather safely in public spaces, reversing the investing outlook for the travel and tourism sectors.
Industries such as airlines, hotels, leisure, entertainment, tour operators, casino, cruise lines, and restaurants which underperformed during the pandemic, are expected to have a sustainable recovery next year as the virus will be under control. With vaccines on the horizon, investors have already started positioning into travel stocks, with some of them posting their best monthly performance in November since the start of the pandemic.
Copper, aluminium, and other industrial metals have enjoyed impressive run-ups in the second half of 2020, driven by the expectations for a full global economic recovery in 2021, the “green” investments, and supply disruptions in South America. Copper is widely considered as the bellwether (leading indicator) of the global economy as its demand depends on global growth.
It is anticipated that an effective coronavirus vaccine together with a mass vaccination in the first half of 2021, could help bring an end to the pandemic and reopen the global economy, boosting the demand and consumption of industrial metals.
The rally has fuelled from the strong industrial demand from China and South Korea, the massive infrastructure spending from the global governments, the cheap liquidity in the money market, the potential for more US stimulus, the optimism over coronavirus vaccines, and the weaker US dollar.
The price of Copper has seen a tremendous rally during the last weeks, climbing to the highest level since March 2013, touching 3.50 per pound. The red metal has risen almost 25% this year and 60% from March lows, on pace for its best year since 2017. The prices of aluminium and iron ore have also recovered from their lows in April.
The US dollar which is the de facto global currency accepted for trade throughout the world has slipped to 2-year lows against most currencies, making the dollar-denominated metals such as base metals more attractive to buyers with foreign currencies.
The first lockdown measures applied in March-May to stop the spread of the virus had hit massively the manufacturing and construction activity around the world, sending the demand and the prices of the base metals to multi-year lows.
Strong demand from China:
Primary industrial metals such as Copper and Aluminium have seen their demand recovering at record levels during the second half of 2020, especially from China, which has historically been the world’s biggest commodity consumer (by 50% of the global demand). China was the first country that exited from the Covid-19 crisis, with its economic growth rates rebounding to pre-pandemic levels.
The base metals benefited from the unprecedented infrastructure stimulus from the Chinese government, allowing the strong restart of the activity of some local industries such as the construction, manufacturing, automotive, and solar-green energy sector.
The use of copper and aluminium in automobile and construction sectors has taken off in the last decade, thanks to their good conduct of electricity, recyclability, and lightweight. The demand for base metals is expected to skyrocket until 2050 amid the greater use of electric vehicles, wind turbines, solar panelling, and expansion of renewable energy capacity to cut carbon emissions.
There are some potential headwinds in the global market which could damage the recent euphoria in the metal market. The renewed trade tensions between China and the USA, which are the largest economies of the world, together with the no-deal Brexit and the concerns over the record-high Covid-19 infections, could harm the demand for industrial metals.