2020 ended with all investment houses in the world agreeing on one thing – a lower U.S. dollar in 2021. From more stimulus to the reflation trade, everything pointed to a lower U.S. dollar. So far in the trading year, so good.
However, trading Forex in 2021 is not that simple. First, commodities are on fire, led by crude oil that just settled above $60 this week. Gold, on the other hand, does not follow, as bears keep punishing the yellow metal. Second, the world’s reserve currency shows signs of reversal, with almost two months gone in the year. Finally, the monetary policy in the advanced world is under pressure as inflation fears mount.
We’ve rounded up everything you need to know about trading forex in 2021 to help you plan and get ahead this year.
Forex News That Matters in 2021
The Australian dollar (AUD) emerged as one of the strongest currencies in the FX market this year. Its advance, especially against the American dollar, is a cause of concern for the Reserve Bank of Australia (RBA), albeit the higher commodity prices countered the negative economic effects of a stronger currency on the Australian economy.
In Europe, the common currency, EUR, remains well-bid despite trading below 2021 highs. Euro suffered from the central bank’s intervention as the ECB repeatedly said that it is closely watching the EURUSD exchange rate as it is too high. Still in Europe, the British Pound (GBP) hovers at the highs, reaching above 1.41 against the USD, on the back of Brexit optimism, a successful vaccination campaign, and positive economic data.
Strong AUD despite RBA’s Dovish Message
The RBA surprised markets at its last meeting in February. Instead of acknowledging the fast economic recovery and the declining unemployment rate, the RBA doubled-down on its accommodative measures. It increased the QE and used forward guidance to signal lower rates for lower.
Naturally, the strong currency weighs on the RBA’s plans, but the message wasn’t heard by the market participants. In fact, the AUDUSD, the main currency pair to watch in Australia, trade in a direct correlation with the U.S. equity markets – higher U.S. indices, higher AUDUSD.
Therefore, Forex news that may influence the U.S. stock market performance in 2021 (e.g., positive for the U.S. dollar) matters the most for the Aussie dollar than local monetary or fiscal developments.
More Fiscal Stimulus from the New U.S. Administration
If the U.S. dollar is one thing that may affect the value of the Aussie dollar, too, then the developments in the U.S. fiscal space are worth watching this year. The Biden administration plans another $1.9 trillion in fiscal stimulus on top of the $900 billion delivered last year. In total, the $2.8 trillion package dwarfs every other fiscal package in the world, with huge implications for the upcoming economic recovery.
Therefore, Forex news that may impact the U.S. dollar, and hence, the stock market, are expected in areas like employment, GDP, or Personal Consumption Expenditure. The quicker the U.S. recovery, the bigger the impact on the U.S. dollar.
Fed’s Average Inflation Targeting
Last year in August, the Fed in the United States shifted its mandate. Instead of targeting inflation close to 2%, it now considers Average Inflation Targeting (AIT). Effectively, it means that it is willing to let inflation overshoot 2% for some period before reversing the course of its monetary policy.
Therefore, inflation news will have a strong impact on the 2021 Forex market. If inflation overshoots in the United States, the spill-over effect into other advanced economies will have a strong impact on their local currencies too.
Commodities News Impact Forex Price Action
Australia is a major commodity producer and exporter. The strong performance of commodities in 2021 so far bodes well for the Australian economy and the Australian dollar too.
In 2021 alone, the S&P500 GSCI, a commodity index diversified across the full spectrum of commodities, advanced over 155. As long as the trend remains in place, the higher commodity prices will partially offset the Australian dollar’s strength.
All Eyes On China
China is Australia’s main commercial partner if we judge by the size of the Australian exports to the country. As 2020 triggered sharp recessions all over the world, the Chinese economy emerged as one of the few that grew in the year. It added 2.3% to its economic growth in 2020, and the forecast for 2021 is that it will grow by 9.3%.
However, given the accelerated vaccination rate against the COVID-19 virus, the chances are that the advanced economies will recover faster than anticipated. Hence, that will benefit the Chinese economic growth, with secondary effects for the Australian economic growth too.
Asia-Pacific economies have outperformed the rest of the world when it comes to how they handled the pandemic, but consistent economic growth depends on the world’s economic recovery; the faster, the better for China and its economic partners.
2021 so far is dominated by herding. Behavioural finance’s definition of herding says that it consists of direct correlations between various markets as people (i.e., traders) think and act in unison. Unless it changes, the challenges for the FX year ahead come from the traders’ ability to interpret Forex news and act in sync with the markets.
Risk-on and risk-off moves often lead to overtrading due to tight correlations. One of the main tasks of a brokerage house is to retain its active customers by offering the best trading conditions available. The broker is a partner for the trader, and the trader’s success is the broker’s success.
Everything You Know in the Palm of Your Hand
As a regulated brokerage house, Vantage FX leaves nothing to chance when it comes to trading. Its Vantage FX app brings the world’s Forex news in the palm of your hand, up-to-date to everything that matters for the FX trader and connected to major news outlets.