Amplify Trading: FOREX Outlook 2021

Okay, very good afternoon. It is Monday, 21st of December, so I hope everyone is doing well. I wanted to take this opportunity to grab some of the members of the Amplify Trading team. So just to recap, I've got the Head of Trading, Piers Curran. I've got the Head of Trading Development, Sam North. And I've got one of our senior traders and who leads our elite training program, Tim Duggan, over in Dublin. And so what I'll probably do is I'll steer the conversation, but really it's just a conversation like what we would have as perhaps a four in the office about our views and our thoughts about the, the year ahead, uh, and then having everyone else listen in really, uh, and ask any questions as we go. So with that, I guess, um, I'll kick it off with, um, how is the market going to perform in 2021? And undoubtedly it comes down to really only one major theme, which is COVID-19, the virus in itself, and the vaccine. So mindful of the fact that trying to accurately forecast where a currency pair is gonna, gonna finish is, is gonna be difficult. But definitely I think we can outline at least our general view of what's going to be important, what are the timings, what of the currencies then are going to outperform, underperform, and so on. So let's just start from the top then. COVID-19, let's have a bit of a recap about your thoughts then for everyone. Of where we're at at the moment. We've had quite a significant development obviously start to evolve right now, which is a new strain of the virus which has spooked the markets to a certain degree. Is this a turning point, and is this going to be one of the main things to look out for then to define Q1, at least as we go forward into 2021? For— and again, thinking specifically about the currency market.

Shall I kick off? Yeah. Yeah, I mean, obviously trying to predict and second-guess the COVID developments week by week, month by month is incredibly challenging. I mean, I'd say that base case, my base case right now— and again, there's risk here with this base case. But my base case would be that, and hopefully it's the case, that this new strain isn't a big enough variance away from the original to make the vaccines redundant. Therefore, you know, I would still— whilst we're going to get plenty of blips and we're going to get plenty of volatility, my base case still remains unchanged, and I'm talking about the whole of 2021 here. And that is that we, generally speaking, move along a pathway where the world emerges, begins to emerge from COVID We are left there with a world that's pumped full of monetary and fiscal stimulus. And as a result of that, I think the big theme— and it's not a contrarian theme by any means. Everyone's talking about it. I think the dollar weakening story is the base case for everyone, including myself. And that— and that, I mean, if you just put COVID to one side for a second, there are two other big things which alongside COVID aren't big. But if COVID does slowly go away, then these other two big things can start to become relatively more influential. And certainly, and the next one on the list would definitely be Biden. And then maybe Brexit, kind of in my sort of order of things here. But for me, it's definitely dollar weakness as a result of more bullish, positive risk appetite globally, a move back, a move out of some of those sort of US dollar-denominated safe havens and move into higher yielding, you know, more emerging market type assets. So of course, don't forget that any kind of rotation of assets geographically requires an FX transaction. I mean, that's the big— one of the big drivers here. Often people often think, well, hang on, FX, I'm just buying and selling different currency pairs. But actually, you know, if you want to rotate out of US equities and you want to buy, I don't know, emerging market Asia equities, with that money? Well, then you've got to sell your US stocks and you'll then have US dollars. And then to get to buy, I don't know, some whatever Indonesian stocks, you're going to need to sell your US dollars, convert that currency, and then buy those stocks in a different currency. So a lot of this exchange rate movement in 2021 might be driven by people coming out of safer haven US stocks.

Well, I guess there's a dual thing to mention there to kind of even further validate that view is that the Fed, with Janet Yellen as the Treasury Secretary, again, it's just going to be like a repeat of the financial crisis, low interest rates, longer mantra, which helps that dollar narrative irrespective of any reflation type risks that might emerge. Do we still see them being incredibly like supportive in that nature? I suppose inflation picking up, I mean, I was reading a couple of different things and they were saying generally it's an 18-22 month pickup of inflation anyway. So we're talking a long way down the road until we start to see the emergence of that, if we see the emergence at all, that is.

Yeah. Well, when you bring in the Fed and Janet Yellen, you know, the other big, the other big change between 2021 and 20— 2017, 2018, 2019 is that actually through '17, '18, '19, the Fed were hiking, right? The Fed were on a much more hawkish pathway compared to, let's say, Europe. So Europe— I'm talking interest rate differentials now. So we had a few years there where the Fed were hiking rates and the ECB were definitely not going to move off zero at all. At any time. So you had a divergence in monetary policy differential. That has just collapsed back because the Fed have taken rates to zero, and they're going to stay at zero right now. The ECB hasn't changed. They're zero all the way. It's just the differential. The Fed went up, and now importantly, they've come back down. And more importantly, they're going to stay at zero. So I think that, that whole differential that led to dollar strength. And if you look at the euro-dollar chart, you know, getting down to like the 105s during, you know, '15, '16, '17, '18, then, you know, that's, that's gone now. And that differential disappeared, which is why I think euro-dollar specifically can continue to march higher despite it being painful for the ECB to watch. I just think they're not going to be able to stop it.

Is there something to say as well with the Biden angle of reverting back to a lesser protectionist stance cultivated by Trump. And therefore it makes then risks associating with those other non-dollar-denominated plays, like you said, looking for yield elsewhere, those currencies can get some relief otherwise, particularly people like even Europe, given that they are in the crosshairs very much so of the Trump administration.

Yeah, I think the Biden effect, yeah, it might have a mild impact on the euro-dollar. It's nowhere near as powerful as that interest rate differential thing I just discussed. I think with the Biden effect, you're going to see a much more powerful reaction on some of those currencies that got hammered as a result of Trump protectionism, the likes of the ruble or the Mexican peso, for example. I think they're probably your biggest Biden trades, or like the Chinese yuan is going to— I certainly think that's going to strengthen as well. So I think with Biden, the Biden effect, it's more like that. I'd say with the emergence from COVID fine, that might drive this euro-dollar back higher. But I also think you're going to see some of those big, the much more cyclical, let's say, commodity currencies should benefit significantly in 2021 if the COVID journey is where we're going to see the COVID effects diminish and we've seen the worst of it. And that's your Canadian dollars, your Norwegian kroners, your Aussie dollars, your New Zealand dollars, these commodity, more commodity-focused economies.

So what does this look like on the charts? So say if we are saying then that there's upside potential for, say, the euro-dollar, what is the upside potential from a technical perspective on that chart? I don't know, Sam, if you want to— yeah, put it up and have a look.

Yeah, let me just, uh, share my screen quickly because I— yeah, I, I agree with the, the, the dollar weakness play. Um, well, yeah, let me just bring up the euro as well. Um, let me just mark up a couple of levels. I, I, I think Well, firstly, for the pound, I was literally just thinking, I, I think we, we do push on, and I think we go towards levels that we, we had, uh, yeah, sort of just above 140, sort of those 2018 levels next year. Um, however, you know, it's not always easy as that, and if this trend line from the low of the year breaks, then it is a different story. And that would be where I'd happily say, okay, well, I'm wrong for a bit now, and it might be worth looking down at sort of 128 on the futures, which has been historically a really interesting level. And that's where, you know, we— and we had this chat not long ago and we were talking about where could be a good place to, to get in for the pound, and 128 was that level. So if I can get that next year at some point, then I'd, uh, I'd bite your hand off for it. For, for the euro, uh, obviously it has been on a bit of a tear, and it wasn't so long ago that we had this trendline near the lows. It was also the weekly trendline, and everyone was saying it's going to break. It didn't, and we pushed on. And there's been great opportunities to get in, albeit a couple of months at a time where it's just gone sideways. This final break above the 120 has been interesting. Um, so from a technical point of view, I think you can remain, uh, bullish on the, the euro dollar as long as we stay above this whole region. I know on, on the weekly chart um, on the longer time frame going back, you know, many years. Obviously we broke above that trend line that comes all the way, uh, to this sort of point. So that's pretty key. Where could we go? Well, similar with the, the pound, when looking at 2018 highs, I think that comes in and then you suddenly say, well, what happens if we break that? Well, putting this then onto the weekly chart, you know, what, what's to say we can't then push on and, and, and get to you know, the 130 and whatnot. I think you'd obviously have a big hurdle from a technical point of view on 125. You can see historically how that's behaved around there. But yeah, for me, I like the, the dollar weakness play. And here's that sort of trend line that wasn't the cleanest in the world, but you can see it did eventually then, then break through. And as long as we stay back above all that and the 120, 118s I'd be happy to say this goes higher. Likewise with the pound, I think eventually we're going to break through this massive resistance. Yes, it is, you know, very, uh, important going sort of 1.35s, but yeah, 1.40 I think next year. I know that's not a massive call, it's only, you know, you know, not a massive move, but I think that's, uh, that's what comes in. I'd say it's wrong medium to short term below the trend line. And then it's the next sort of line in the sand at 1.28, 1.2750 for that.

Well, um, you've got the sterling chart up there on the higher time frame. So Piers and I had a chat, not sure if everyone would have seen it at the time, but it might be good to do just a short recap then of the general view for sterling around— first of all, let's just talk about Brexit first of all. So a quick update of where we are at the time of filming this. The latest is the hard deadline was Sunday, and Sunday has gone. And so this is about the 10th deadline that's passed and nothing has happened. Piers, why don't you just summarize then what we were saying before, and your view about the idea of that this could roll over quite, quite easily into 2021 at this point.

Yeah, so in short, having traded the Brexit journey for 4 and a half years, what's happening now should be of no surprise to anybody, in so much as the negotiating scenario between these two parties has always been that you go right to the death. You know, you're playing your poker face, you're keeping your cards close to your chest. And it's about trying to find that middle ground that we can move forwards. And there's big reluctance to shift. And then we have deadlines and they get missed. We have more deadlines, we get missed. But, you know, ultimately in the end, fine. Now they're talking about, right, there's going to be an agreement before Christmas. But, you know, really, the 31st of December 2020 is, is a good deadline. In so much as, well, all right, that's when we— the transition period ends. But make no mistake, that doesn't mean to say that things can't carry on being negotiated beyond that. So, and the point I made earlier in that discussion we had a couple of weeks back, and was that actually what we're negotiating, what they're trying to agree on here is relatively speaking a hard Brexit anyway, even if they do get a deal. And that's because if you go back to the 2016 election, you know, back at that point we were uncertain: will we come out of the single market, will we not come out of the single market, will we come out of the customs union, will we not come out of the customs union, can we negotiate a deal, will we stay in the single market? Well, all that's gone because we're coming out, right? So we're going to be out of the single market, we're going to be out of the customs union, So that's kind of Boris's hard-ish Brexit. It's kind of— they're trying to negotiate a deal on Boris's hard-ish Brexit. And look at the pound. I mean, you've had some short-term volatility, but it's trading up. It's trading at 1.33 against the dollar.

All right.

It's weakened a bit more against the euro. But I guess my point is, don't expect an agreement before Christmas. I'd say it goes till midnight, 31st of December. And even then they might agree to carry on talking rather than actually done a deal, guys, look, signed it. So you're probably going to get some sterling volatility as each of these kind of deadlines get past. But you can see that over in the big scheme of things on this long-term chart that Sam's showing us, yeah, fine, you're going to get short-term volatility, but I don't think it matters so much because in the end the big thing that will impact the pound's value is COVID-19. That's a much bigger risk to the UK economy— positive and negative risk, by the way— to Brexit in terms of how it might alter UK GDP in 2021. It's all about COVID like all of it almost, and then this tiny little thing that's in the mix is Brexit.

That, that relative difference with particularly COVID in mind, does that come into play when you think about the kind of more fractured nature of a US nationwide response, given the federal and state-led way in which they operate, comparative to say, with the German government, this is what we're doing?

Yeah, that's a really good point, and I think that, well, that does apply. So again, thinking about currencies, like when you talk about Germany, your problem there is that they have their own currency.

Right.

So when you're thinking about the euro, okay, and when you're thinking about centralized policy, then they do have a habit of taking their time. But if everyone, if all governments in the eurozone acted at speed like the Germans, then, okay, yeah, that can be positive for the euro. I think you're exactly right. In the federal system in the US, it just takes longer, especially with with divided Congress and all right. So they've just passed this latest bill and you've seen how long it's taken them to get that second fiscal bill passed. It just takes longer. And I think you're right, governments can be more decisive and take action. Perhaps you could say that's a positive thing for their economy's ability to weather the storm. And maybe you could say that's a positive from a, from a exchange rate point of view.

One area, Piers, that Tim and I started to get into this morning, would be interested to get your take, is that if you remember back in 2009 era when everyone was kind of panicking about the future inflation that would be created by this new unconventional thing which was then unheard of, which was quantitative easing, And we were talking about the fact that inflation never really emerged in that post-recession period or global financial crisis. And then here we are again now, and people have started to talk about reflation and future inflation. What do you think? Is there comparisons there to be drawn? And what's the difference this time, if any?

I think it's a really— so basically in 2009, there was in the end a minority, but still a quite aggressive resistance to quantitative easing. And that was because of those inflationary fears, right? It's going to create inflation and it's going to be a disaster. Not only were they not right, I mean, to say they were not right would be a monster understatement. They were spectacularly wrong. Economic theory was— had to, had to be rewritten, literally. Now, I think one of the big reasons for that is, well, where does this money go, right? The whole idea about the inflation thing is that, you know, you pump the system full of money, and it not only devalues your currency, which is inflationary in itself, but But also then you start this big kind of upside demand cycle which, which drives prices higher. So it just didn't happen. And then inflation actually stayed incredibly benign and very low throughout the whole period. Now, is it different this time? And I think it is, but I'm not sure it's that different. I think the reasons around why it's different is because stuff like the, the whole rich-poor divide thing, you know, that wealth gap thing, has started to be addressed by the political shifts that we've seen in the last decade. The reason— one of the reasons why there was no inflation last time is because stocks went up. And who owns stocks? Well, the rich. So are the rich going to actually end up spending this increased wealth they've got? Well, no, in percentage terms, they don't spend it. It's just sat in their kind of share account, right? What if you want to drive inflation from a demand perspective? You need actually the lower income portion of society receiving more money because the lower income portion of society will spend it all. Because they haven't— they're relatively— well, for obvious reasons. And that would create the inflationary boost. Now, a lot of what's happened during COVID is that you've seen major policy shift, which has supported— I mean, I don't want to get into the argument of has it supported the wealthy or the poor, but I still think there's a massive problem with the wealth divide. Okay. It's been addressed marginally. And because it's only been addressed marginally, I think that's your difference where it might be a slightly more positive inflation story. But in the end, do I think inflation is going to surge 3%, 4%, 5% in developed economies?

No.

Do I think the Fed changing their policy to a more relaxed inflation target. Does that make any difference? No. In reality, inflation's only going to go up if people start spending money. And what's going to happen when government support gets removed? How many businesses fail? What happens to the unemployment rate? I don't know.

So maybe could I continue on to maybe help with that question of, okay, so the most obvious thing we're all seeing is dollar weakness. And are we— so question number 1 is, do I get long every major dollar currency pair right now? And if so, uh, you know, what's my risk? And then number 2 is, if I'm not taking that trade now, when should I be looking to get into those trades? What sort of rhetoric out of Washington? What sort of COVID situation? Um, how would I look to get into that trade if it's not this week?

Yeah, go for it.

So I'm posing it to the, to the room here.

I mean, yeah, I— so I, my, my, my approach is kind of goes back to what I said earlier about this trade has started, you know, you've missed the bottom, but that's fine because it doesn't mean your opportunity is now vanished. It's about a trend, right? Yeah, it's a trending market, and it's so— it's waiting for I know it's easy to say, but let's wait for the pullbacks. So when do the pullbacks happen? Well, have a look at your screens right now. I mean, there's a pullback now. It's waiting for these episodes, short-term volatility episodes where you get a setback on this COVID recovery. And it's those setbacks that create the pullbacks that then create your buying opportunities. If you think that those long-term trends— if you think the dollar is going to weaken throughout 2021, well, then you need to jump on the bandwagon and there'll be plenty of opportunities. Each time the opportunity comes along, you're buying in at a worse level. But that's the nature of a trend, right? So it's waiting for— waiting for big pullbacks, like using— like Sam had a nice sort of channel there on cable, for example. He's waiting for the pullbacks, which will be driven by a short-term COVID setback will drive those pullbacks. Looking for the bottom of channels, looking for key supports like 128. You know, it's just having these big numbers in mind. And at the moment, between now and the end of the year, it's the channel or it's 128, right? Now we might go into quarter one, you might miss that, and fine, this, this trend kicks on up another level. And then you've got new price points, new key supports. Obviously that channel will have shifted higher. And so how do you trade the trend? Buy on the pullbacks.