The trading year is not even over yet, and the market participants already play the reflation game. One of the themes everyone agrees upon is the weak USD heading into the next year. Before looking at some forecasts, it is worth starting with the bigger picture. When trading, speculating, or investing, the bigger picture is very important.
Let me give you an example. Let us suppose that I am a currency trader, and you ask me what my opinion is on the future EURUSD direction. Suppose I am bearish and say that the EURUSD will go to parity (i.e., 1) with the USD. However, not only the direction counts in a forecast – but the time as well. When will it reach that level? If it does so in the next couple of decades, I may not be interested in trading it.
The same with the USD. While everyone is on board with the reflation theme, let us not forget where the USD stood at the start of the coronavirus crisis in the foreign exchange reserves structure. Nothing changed in the meantime, and we can see that the position of the USD is literally unchallenged – the Euro comes in second place, but the USD demand is almost three times larger.
Spot the Consensus
It is part of the job of investment houses to publish a forecast for the period ahead. Some use a quarterly approach during the trading year. However, at the end of the year, it is accustomed to publish a twelve months forecast.
Nordea, one of the largest investment houses in Europe, just did so. It covers most currency pairs part of the FX dashboard all the way to the end of 2022.
When interpreting such a table, it is worth considering the time element. The closer to the current date, the most accurate the forecast should be.
For the EURUSD, Nordea sees a slight decline in the next three months, and then by mid-2021, the pair should reach 1.23. Moreover, it will continue to gain all the way until 1.26 by the end of 2021 and 1.30 by the end of 2022.
We will stop here because the reflation theme (i.e., lower USD) was proved. This is the consensus in the market, and by checking the other USD pairs, you will note that the USD declines across the board in such a scenario.
However, trading is not that easy. If it were, everyone would do it successfully.