Two institutions recently released their notes on specific currency pairs. We check their expectations in the long term for 2021 and in the shorter term with specific levels that these institutions think are worth paying attention to.
As reported by Bloomberg, TD Securities has decided to open a short position on the major currency pair EUR/USD. The changing risk sentiment and the prospects of higher real interest rates in the US due to bond supply and fears of monetary tightening by the Fed open an opportunity for short positions on the pair on EUR/USD, TD Securities says.
With several factors pointing to a weak dollar this year, the short-term outlook favors a stronger dollar, according to the firm's Monday note. TD Securities does not expect a change in trend, but a corrective strengthening of the USD against the EUR. Thus, the institution cited by Bloomberg opened a short position on EUR/USD at 1.2170, targeting 1.2050, with a stop at 1.2325. Today, EUR/USD set a low at 1.2108, being the lowest in five days.
The Federal Reserve is buying fewer 10-year Treasury bonds, according to TD, which, with an increase in the supply of debt due to a planned $1.9 trillion relief package that could take effect in March, could lead to higher US bond yields and higher real interest rates. TD also expects a more infrastructure and green economic proposal this fall, which should also push U.S. market interest rates higher.
Meanwhile, Canada's Scotiabank assumes the U.S. dollar will fall against the Canadian currency in 2021 as commodity prices may rise and may support commodity currencies, the bank's strategists said in a Monday report cited by Bloomberg.
Scotiabank assumes U.S. growth will outpace Canadian growth in 2021 at 5 percent versus 4.3 percent, but Canadian growth will outpace U.S. growth the following year at 4.3 percent versus 3.7 percent. Without higher growth and yields, the USD looks more vulnerable to negative structural factors (as it has in previous cycles of USD weakness) like fiscal and current account deficits, Scotiabank analysts said. The institution's second idea is a short position on EUR/GBP. Other favorites include a long position on the Mexican peso (MXN) and Brazilian real (BRL) against the Swiss franc (CHF) and Japanese yen (JPY), as well as a long position on AUD/JPY.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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