Closing October with a 2021 Outlook

In 2020, we were right that any steps towards making the EU a more sustainable interdependent unit would merit the Euro rising in value. Naturally, this was not happening in an organic way as fiscal austerity became the norm ever since the financial crisis and solutions to it in 2009. For 11 years, the EU kept the Euro alive and maintained members from leaving the monetary union even with Greece’s debt default threats.
COVID-19 changed everything for all of us and what it produced was a more unified Europe is spending its way out of chaos. Indeed, the €750.0 BN rescue package solidified the apparatus of the EU as a more cohesively united front on aiding each other. Fiscal integration is the ultimate factor keeping EUR above 1.15 for the long-run. EUR appreciation ever since March has had its bumps and outrageous climbs (like above 1.21 for a moment), but the swings were to be expected as we handled the unexpected.
While the guidance is not there fully and we see a blurry Q4 ahead, we have faith that in 2021 the forces of the European Central Bank, and exporters, will influence enough to keep the Euro from rising too high while this new sense of accomplishment among EU leaders may leave plenty of EU/EUR doubters scratching their heads into next year as it fails to sink into parity with the buck once more in their forecasts.

We have complained about Britain’s divorce for so many years that the fact that we may be near the endgame feels almost unimportant. After 4+ years, businesses and technology have made adjustments, but the governments are still trying to negotiate something that will prevent the U.K. from trading within WTO rules with its closes trading partner. The demands over details have turned off most people, especially the U.K. population who may be, once again, turning against the Conservative administration over Brexit matters.
As the politics of it all only threaten to damage what was a good relationship with EU nations, the London government must face the consequences of leading the rest of the British nations along with its plans to re-create international dealings with other countries without EU-membership norms. Scotland could turn to be a dramatic player if Nationalist leader Nicola Sturgeon succeeds in calling for a vote that according to recent polls, could decide independence from the U.K. is desired by over 55.0% of the Scottish populace.
We are of the belief that the threats to the U.K. economy are serious once there is no deal, but we think they will all just kick the can down the road a bit more and realize a lot of things need to stay basically the same for the sake of equivalence.
Thus, expect the 1.3000s to establish themselves as volatility gauges spike as we head deeper into the final stage this year. 2021 could be positive if Brexit calamities are avoided.

While we do not make a prediction on the CNY because we do not have an inside guy at the People’s Bank of China, we do see a clear path to overall more usage. The PBOC’s decisions and controls are loosening a bit, however. In fact, China has gone beyond making sure its Renminbi is more than just an approved reserve currency by the IMF. The past three years have seen an increase in the use of CNY in invoices that were only before in USD and China’s reach into development for Africa and Latin-America have allowed for more circulation of the tender.
The rate of exchange has actually improved by over 7.0% since reaching its nadir back in May of this year. More importantly, the Chinese seem to be ahead of the U.S. and other Western nations when it comes to providing digital currency solutions, and with China commercialization still on the rise, new tech could help CNY make further gains and perhaps trade even more freely allowing the forces of supply and demand to do what they may. At 6.68, it’s already at the best level since the start of 2018 and another 7.0% appreciation by Q3 this time next year could stand at a realistic 6.24.

Juan Perez Senior FX Trader and Strategist Monex USA

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