FX weekly: How will consensus be wrongfooted in 2021?

20 December 2020

FX weekly Howwill consensus be

wrongfooted in 2021Martin Enlund | Andreas Steno Larsen

EURUSD consensus is super bullish ahead of 2021 and while we agree on amove towards 125-127 we also take note of several warning signals of ldquogreyswansrdquo Could the consensus be wrongfooted (again)

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Table 1 Our current convictions

Quote of the week

ldquoA consensus means that everyone agrees to say collectively what no one believes individuallyrdquo Abba Eban

We ldquokilledrdquo our longs in EURGBP (in the money) last Monday which was probably a decent idea since bothBoJo and Von Der Leeyen suddenly sounded like no-dealers Do you a get a more obvious market signal as acontrarian market participant than two politicians admitting to a worst-case scenario as a base case We havedevoted this version of the FX weekly to a discussion on how consensus can be wrongfooted via grey swansin 2021 We remain long EM vs USD (and indirectly EUR) meanwhile

Global On swan-patrol

Do you like swans We like swans and you should too After the Fed we dont see any reason to stop sellingdollars So we probably should keep doing that until something surprising happens All large investmentbanks but one are negative on the dollar going into 2021 With that in mind we note that the consensus waswrong in 2017 wrong in 2018 and wrong in 2019 Perhaps ldquoeverybodyrdquo will be wrong again (Dark bluelines = the 1y ahead consensus estimate for the EURUSD at the time)

e-marketsnordeacomarticle62193fx-weekly-how-will-consensus-be-wrongfooted-in-2021

Chart 1 EURUSD has behaved badly in recent years (vs the consensus)

Broader USD positioning measured as dollar amounts according to IMMCFTC data suggests we may havebecome stretched already The below chart shows the most stretched positioning since 2011 or 2007


Chart 2 Most stretched positioning since 2011 or 2007

There are certain similarities to 20172018 in the current EURUSD price action both from a positioning anda fundamental perspective During the late summer the ECB tried to contain EURUSD from moving higherwhich was also the case this year Barring (unlikely) rate cuts it seems as if the ECB is fighting an almostimpossible battle on the EUR front but they may be saved by fundamentals Relative financial conditionsbetween the Euro area and the US are pointing to a substantial possibility of US outperformance of theEuro area in 2021 but as long as the global growth rebound is perceived as synchronized and broad-basedthe USD smile is telling you to buy EUR vs USD This narrative may be tested if the gap between US andRoW growth grows too big during H2-2021 We believe in a move towards 125-127 but we also find itworthwhile considering accepting a take-profit level around 125-127 in return for a put around 119 in EURUSD (sell a call and buy a put zero cost) ndash also from a portfolio perspective (Multi asset 10 + 1 tail trades of2021) The risky is even in favour of such a strategy


Chart 3 20172018 vs 20202021 in EURUSD 125-127 and then back lower

Whenever a surprising-enough event unfolds we may thus get big moves against the current consensusand positioning While it is in the nature of black swans to not be predictable one can always find some greyswans For instance EURUSD has behaved very much like after the presidential elections of 2000 20042008 and 2012 And if this history keeps rhyming the pair may peak ndash surprisingly early ndash around New YearrsquosEve


Chart 4 EURUSD has been heading higher just as after most recent Presidential elections

Perhaps a peak of vaccine stories could also dent the reflation trade After all the SampP500 future bottomedwhen journalists ran out of e-ink when writing virus stories More than 30 of all stories in the terminaltouched upon the virus in one form or another on some days back in March For sure at some point thereflationary juice oered by positive vaccine stories will have reached wayrsquos end

Whatrsquos more we often joke that the consensusrsquo trades of the year are blown to smithereens around the thirdweek of January Perhaps too much good news will already be priced in when a newly vaccinated Joe Bidenis inaugurated (presumably in a zoom telco) Letrsquos hope he doesnrsquot keel over from any surprising side eects


Chart 5 When will we reach peak vaccine positivity in terms of the news flow

The biggest outstanding vaccine question remains whether Emerging Markets will benefit as quickly asdevelop markets during the vaccine rollout We took a look at Beta to vaccine news among the biggest EMcurrencies and even if EM FX has already performed materially it may be that EM will get another pieceof tailwind from vaccine news from Astra and JampJ since those vaccines will have a wider reach and a lowerprice per dose BRL remains the clearest vaccine bet despite Bolsonaros esoteric comments on the vaccineThankfully a president is not in charge of the vaccine roll out Less bizarre longs are ZAR and MXN which areboth currencies that should gain if Astra gains some momentum in the phase 3 result and the subsequentvaccine rollout (EM FX The vaccine bet ndash which EM currencies are high beta to the vaccine rollout) Weremain upbeat on EM FX but we also remain on the watch for potential grey swans in to 2021


Chart 6 EM FX beta to the vaccine news index

Another interesting trigger of less benign outcomes for eg EM stem from the currently scheduled deadlinesof various support measures for the worldrsquos economies As ECB Lane recently said ldquohellipsupportive policies suchas loan guarantees and moratoria together with capital relief provided by supervisory authorities have alsobeen eective in averting a liquidity crisisrdquo What happens when these relief measures end

Chart 7 End of support measures a potential grey swan for 2021H1


Elsewhere we note that our rates and positioning-based model still suggests a higher EURUSD The ldquofairvaluerdquo for EURUSD has however stabilised and started to edge lower lately owing to a relative rise in USyields as well as a build in USD-negative positioning In our world a further sell-o in US fixed income in2021H1 would lower the fair value estimate of the pair and thus help buttress the USD

Chart 8 Model estimates of EURUSD suggest upside but the fair values are not moving upanymore


And we do believe that at least long USD bond yields will pick-up during 2021 The cyclical backdrop remainsbenign and there is a possibility that the re-opening of the service economy will coincide with a massiverdquoketchup eectrdquo from lagged eects of stimulus seen during 2020 The Fed kept a dovish stance even with amore upbeat tone on the medium-term outlook but Powell and his lieutenants keep talking about a strongH2 next year How about a massively strong H1 We still find that the USD curve is priced too bearishly andit may be that scenarios could unfold in which the Fed could hike before the middle of 2022 (Fed reviewSteepeners are not steep) ndash yes steepeners are already consensussrsquoy but when markets are surprised in thedirection of higher long bond yields it tends to happen substantially faster than discounted


Chart 9 The cyclical backdrop points at higher USD rates

Liquidity premiums could on the other hand fold like a lawn chair in USDs We have already seen howEURIBOR3M and STIBOR3M have converged towards the deposit rate from the central bank as theoverflooded commercial banking system can accept zero (or even negative) liquidity premiums in theseflooded regimes If the congress agrees on a material fiscal deal we expect the Treasury General Account(TGA) to be lowered markedly and in any case it looks likely that the TGA will be taken down substantiallyahead of the debt ceiling deadline next summer

Should the Republicans keep the Senate majority after the Georgia re-runs it is likely that the debt ceilingdebate will turn into another political stalemate LIBOROIS is priced to remain at gt15 bps territory over thecoming 12 months but why should USD markets trade with a liquidity premium if the TGA is emptied and theFed continues with 120Brsquos a month This is on the margin supportive of our steepener call


Chart 10 What if the TGA is emptied before the debt ceiling deadline next summer 0liquidity premium coming up

Looking at equities the strategy consensus for the SampP500 has landed for 4035 for the index for 2021 Fairlybullish wersquod say


Chart 11 Strategy consensus sees SampP500 at 4035

Keeping that in mind we find it interesting that one of our long-running models of ISM manufacturingsuggests a peak in ISM at ~63 in May 2020 and according to the relationship between SampP500 and the ISMa level of 63 suggests 4040 for the SampP500 index in May Since thatrsquos what our model suggests perhaps thatshould be the main scenario But it does suggest that some markets may be getting ldquopriced to perfectionrdquoalready during the autumn 63 is after all very very lofty H1 could be fantastic but H2 could turn much lessbenign from a momentum perspective in contrast to at least Fed momentum


Chart 12 rdquoFair valuerdquo for SampP500 derived from ISM

SEK Could a SEK tantrum trigger a dovish Riksbank turn into the rebound

Turning to the SEK it has done what it usually does this time of the year ndash with EURSEK heading southonce the PPM flow story is out of the way The average seasonality between 17-Dec and 31-Dec over thepast decade suggests a further 1 downside in the cross At current levels the SEK trades ~12 strongerthan Riksbank anticipated in November - not enough to cause that much alarm However if the trend of SEKappreciation continues in coming weeks perhaps the Riksbank could try to verbally intervene

On December 30 2015 Riksbankrsquos head honcho Ingves intervened when the trade-weighted SEK was27 stronger than expected EURSEK had then dropped from ~935 to 912 in two weeksrsquo time A similardeviation today would suggest a possibility for verbal intervention around the 995 level That said we wouldargue that the Riksbank will need a bigger deviation this time around as it does not appear to be as panickedby the inflation outlook Still perhaps rising intervention fears may start to matter for market psychology overthe next several weeks and help buttress the cross somewhat Maybe a EURSEK put spread and a Sep+3mFRA receiver position is the right cocktail Trade 5 in our 2021 publication (Multi asset 10 + 1 tail trades of2021)


Chart 13 Moves in EURSEK between December 17 and December 31

NOK Less NOK buying due to a flooded Norwegian TGA

The Covid-19 crisis never ended up with the same cost-base as eg Norwegian and Danish administrationsprojected which has led to cash hoarding from the administrations at the account at the central bank InNorway a doubling of the Treasury general account at Norges Bank has led to problems in the FX swapmarket over the autumn and according periods of higher Nibor Norges Bank will have to address the issue ofstructurally low liquidity in the commercial banking system during Q1 of 2021 as the structural liquidity willotherwise remain below target levels in long periods


Chart 14 The liquidity outlook looks too tight in Norway unless Norges Bank acts

The most likely solution is to reduce the deficit funding transfers to the Treasury from the oil fund mechanismThis process has already started as Norges Bank has bought less NOK for the Treasury since mid-NovemberWe expect this to continue during the first months of 2021 and accordingly we expect NOK purchases to be500 mnday or less in Q1 This will most likely reduce the Treasury accounts by 70bln or more and will havea similar positive eect on the structural liquidity If this scenario unfolds the risks of large move in in NOK FXswaps and Nibor in February will be substantially reduced This should not be confused with a negative NOKspot story even if Norges Bank buys fewer NOKs There is still a substantial latent potential in NOK during Q1when the service economy re-opens in the Euro zone as it will allow the total Norwegian export basket toincrease in value (Less NOK purchases please the Government coers are full)

We wish you and your loved ones a fantastic holiday season FX weekly will be back 3rd of January

Best regards from Andreas and Martin


Chart 15 Liquidity if Norges Bank only buys 500 mnday during Q1 2021

Our running track-record (updated monthly here) is always attached here

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Martin EnlundGlobal Chief FX StrategistMartinEnlundnordeacom

Andreas Steno LarsenChief Global FXFI Strategistandreasstenolarsennordeacom+45 55 46 72 29


Chart 1 EURUSD has behaved badly in recent years (vs the consensus)

Broader USD positioning measured as dollar amounts according to IMMCFTC data suggests we may havebecome stretched already The below chart shows the most stretched positioning since 2011 or 2007



















































































































































































































































FX weekly: How will consensus be wrongfooted in 2021?

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Transcript of FX weekly: How will consensus be wrongfooted in 2021?