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FX Macro Themes for December

Macro Themes for FX majors:

EUR/USD: Lagarde guarding the 1.20 level!

In next month we have the ECB meeting, markets are expecting an increase in both the LTROs and PEEP program, all of this is already in the price and I don't think that it will be a market-moving event except if the ECB comes less dovish than expected, the other thing that we should keep an eye on is how the ECB will react to the recent rise in the Euro with the CB fight against deflation, the Eurozone is expected now the go into contraction in the fourth quarter of this year, but for the currency, it's more down the USD weakness than EZ fundamentals, USD weakness is one of the main themes going into 2021, with the World economy recovery and investors feeling confident about the outlook, we will see some capital flows going out of US assets into high yielding emerging markets. technically the dollar index DXY has broken below the 92$ key level and open the door for more weakness to come.

GBP: It's all about Brexit!

The economic outlook for the UK doesn't look bright, but the Brexit trade deal is still the major concern for sterling right now, the currency did gain 3% against the dollar in October in line with my expectation as I was advocating going long GBP in my latest edition of FX macro themes, but now I think the upside is limited, especially with major differences still in the negotiation, so the best-case scenario is that we're going to have a skinny deal, for that expect sterling to trade range-bound in the short term.

CAD: Rates will stay low forever!

The bank of Canada governor Macklem has reiterated that rates are going to stay low until at least 2023 and that negative interest rates are still in the toolbox, for now, markets aren't taking the latter part seriously because of the strong recovery that we're seeing in the Canadian economy, but for me, the main takeaway is that they will not raise rates before the FED, giving the neutral stance by the BOC at the moment, Risk will be the major driver for the loonie going forward, as we can see there is a high negative correlation between the S&P500 and USDCAD.



AUD: The reflation trade is set to resume!

The Aussie dollar has gain 4.5 % against the dollar in the last month, thanks to improving Risk appetite after that Pfizer vaccine news. the RBA has cut rates to 0.10% and launched its first Quantitative easing, all of this is in the price right now, But I still have an upside bias for the Aussie, due to strong demand coming from China, also now with president-elect Joe Biden expect less Geopolitical tension between the US and China, and finally with vaccines on the horizon the reflation trade is here to stay.

--- Written by Halim Haddad,

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