Are you ready for 2021? - The ultimate guide for companies navigating currency volatility and scenario planning - Financial Director
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Are you ready for 2021? The ultimate guide for companies navigating currency volatility and scenario planning.
Contents
SECTION 1 4 SECTION 2 7 SECTION 3 16 SECTION 4 21
Global outlook Market themes FX forecasts Risk management
Key global events calendar. . . . . . . . . . . .5 The COVID recovery disconnect . . . . . . 8 GBP / USD The dollar’s rise and fall . . . . 17 Protecting profits post-crisis . . . . . . . . . 22
The big picture . . . . . . . . . . . . . . . . . . . . . . . . 6 New ‘lower for longer’ paradigm?. . . . 9 GBP / EUR The revival of the Euro . . . . . . 18 Considerations . . . . . . . . . . . . . . . . . . . . . . . .23
Today's global trade is not like 2008 . . 10 GBP / AUD Restored appetite for Aussie 19 Contact us . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Transatlantic battle for dominance . . 11 EUR / USD A durable uptrend? . . . . . . . . 20 About us . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
UK trade facing pivotal year . . . . . . . . . 12
Try and isolate China . . . . . . . . . . . . . . . . . 13
CEE growth model to transform? . . . . . 14
EM currencies backed by yield . . . . . . . 15
Foreword
Contents
The rise of geopolitical themes such as trade As companies now transition into the ‘new normal’
Global outlook
wars, and the growing influence of political and re-structure plans for 2021, the risks to financial
objectives from economic and currency fluctuations
figures on financial markets, has significantly
remain acute. Yet future scenario testing and
increased the complexity around judging subsequent risk analysis remains an incredible
future market trends and their implications challenge for many companies, especially SMEs.
for international business. COVID-19, For importers that rely on sourcing from abroad or
Market themes
however, brought a whole new dimension exporters of services, swings in currencies can make or
to global markets. break profits. Despite this, numerous studies, including
our FX Barometer Report, continue to uncover that
The pandemic has triggered a broad and rapid companies from manufacturers to charities still do not
disruption to economies, business operations, fully understand or have the resources to sufficiently
technology and infrastructure worldwide. Regardless of hedge this risk and protect profits. Better access Andrew Summerill
size or sector, business leaders have had to respond to to technology, information and expertise are still
FX forecasts
President, Payments
the "Great Lockdown" crisis at an unprecedented scale, needed here. at Western Union
whilst dealing with levels of sales uncertainty, currency In this report – the latest edition of our annual guide for
volatility, and cash flow risks previously unseen. companies navigating volatility and scenario planning,
Exchange rate volatility particularly will be brought into we uncover the key market trends and events set to
the forefront as we look ahead towards 2021, given it reshape financial markets and currencies.
Risk management
has a vast impact on the profitability of international We hope it continues to deliver on our commitment to
trade in goods and services. provide decision-makers better access to information,
To better appreciate this shift in dynamic, one index enabling for more substantial strategy development,
measure of economic policy uncertainty showed that and thus producing better financial outcomes.
index levels in August 2020 were 52% higher when
compared to this time last year.1 Furthermore, measures
of anticipated currency volatility rose from record lows
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in January to an 8-year high by March and remain
elevated.2
1. Economic Policy Uncertainty Index. Source: policyuncertainty.com
2. Global FX Volatility Index. Source: JP Morgan, August 2020 3
Contact us Risk management FX forecasts Market themes Global outlook Contents
SECTION 1
Global outlookKey global events calendar
Contents
The key political dates and economic projections below represent important flash points and illustrate the inherent complexity of currency markets.
Yet there are also several ongoing and over-arching global themes that will reshape market trends and drive currency volatility, such as:
Global outlook
US-China trade relations COVID-19 vaccine development Zero interest rate monetary policy
2020 2021
Market themes
OCTOBER NOVEMBER DECEMBER JANUARY MARCH (1) MARCH (2)
European Council Summit US presidential election End of the transition period Inauguration of the US president UK Budget US Federal Reserve
A key check point on Brexit On Nov 03, Donald Trump On Dec 31 the UK will exit New president sworn in on Jan 20. UK Chancellor to & European Central
Bank meetings
FX forecasts
negotiations and the EU's faces off against Democrat the EU customs area. Will How will either Trump or Biden lay out new plan for
economic recovery. contender Joe Biden. a trade deal be in place? impact the US recovery? government spending. New policy and
economic projections.
2021
Risk management
APRIL MAY JUNE JULY – AUGUST SEPTEMBER OCTOBER
Release of Q1 GDP / Local UK elections & US Federal Reserve & Release of Q2 GDP & FED’s US Federal Reserve & National German &
IMF spring outlook Bank of England meeting European Central Bank Jackson Hole symposium European Central Bank Japan elections
Initial Q1 GDP estimates Local votes to depict meetings Initial Q2 GDP estimates meetings Potential change of
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released / New global national mood amidst New policy and released / Annual US New policy and government in both countries.
growth forecasts from IMF. COVID / New BOE economic projections. central bank conference economic projections. The German chancellor to
economic forecasts. in late August. retire after four terms.
5The big picture
Contents
It’s always challenging to analyse every perspective, $15 trillion is nearly 20% THEME 1 THEME 5
single emerging trend impacting an $87 of world GDP.
trillion global market; however, when The COVID recovery UK trade facing
Global outlook
This is what will make 2021 especially
ECO N O M Y
you look at the bigger picture today, unique, as this gigantic amount of disconnect pivotal year
it’s clear to any observer what is the
B R E XIT
stimulus and our emergence from the
major macro driving force leading our The global economy is recovering, If there was no Brexit, COVID-19
Great Lockdown will come at a time
transition into 2021. but there’s a disconnect that’s could have actually helped
when many other major themes will
unsettling. tighten UK-EU trade relations.
The world is still living through and reach a critical inflection point.
recovering from its most severe Money-printing 2.0 and a lower bound
economic downturn in modern history. of zero interest rate policies take
Market themes
Amidst the Great Lockdown, more than central banks into an unprecedented THEME 2 THEME 6
90% of countries could experience an new monetary era. These
annual economic contraction, while unconventional policies, designed New ‘lower for longer’ Try and isolate China
emerging markets collectively are at to save livelihoods, will influence paradigm?
risk of recording their first year without Facing an economic and politic
POLICY
sentiment ahead of major geopolitical
CH I N A
growth in at least 60 years. Counter-COVID polices have backlash, China will face a year
outcomes ahead such as Brexit and
taken the world into a new ahead like no other.
The timing of the post-pandemic German elections.
monetary era.
economic recovery remains highly Global trade, which lost considerable
FX forecasts
uncertain and reliance on a vaccine momentum under the weight of US-
gives the recovery a more binary China trade wars will be another major
character which materially polarises driving force for economic and currency THEME 3 THEME 7
any 2021 forecasts. There is hope, and volatility. US elections – a multifaceted
$15 trillion of it too – that’s the total catalyst we’ll cover in another special Today's global trade CEE growth model
estimated amount of both injected and report – alongside the acceleration is not like 2008 to transform?
pledged stimulus from the G10 group of ‘China + 1’ trade strategies will also
Risk management
TR A D E
plus China since the crisis erupted. For impact the way markets will evolve. Joe Biden’s $700bn “Buy American” The region could eventually
plan could further accelerate the establish itself as a frontier
CEE
shift in world trade. market in digital transformation.
2021 will be especially unique. Our THEME 4 THEME 8
unpredictable emergence from the Transatlantic battle EM currencies
Great Lockdown will come at a time
E M E RG I N G
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for dominance backed by yield
P O L ITI C S
when many other major global themes
Nawaz Ali US-EU post-pandemic growth EM markets are currently
will reach a critical inflection point. Head of Insights differentials could overhaul offering a ‘20 times higher’
the balance of power. rate advantage.
6Contact us Risk management FX forecasts Market themes Global outlook Contents
SECTION 2
Market themesTH EME 1
The COVID recovery disconnect This divergence is a problem
Contents
Elevated equities vs. collapsed consumer confidence
The unprecedented upheaval in asset outperformance. This is creating
financial markets has delivered record a growing divergence between stock
volatility across different asset classes. markets and the real economy, shaping S&P500 index Monthly data: 2020 2000-2019
The sharp fall in stock markets, energy what is arguably a false sense of optimism
3500
Global outlook
prices and risk-sensitive currencies, about a speedy economic recovery. July
Extended period January
ahead of state-forced lockdowns, has
Amid a prolongation of lockdown of disconnect May
been countered with an equally sharp February
measures, an estimated 305 million 3000 between equities and June
recovery in many cases. consumer confidence
full-time jobs could be lost globally
April
Leading the recovery hopes are equity according to the ILO*. States cannot March
indices, which in the US have reached compensate for this lost income 2500
new record highs since plunging in indefinitely though and at some point,
March, despite the global economy the real economy will have to stand on
Market themes
slipping into the worst recession its own two legs.
2000
since World War II. Global fiscal
Should lockdowns be extended, and
support currently stands at around
geopolitical tensions continue to boil,
$11 trillion and has provided investors
then recovery hopes may dwindle, and 1500
with confidence about an economic
stock markets may soon reconnect with
recovery. Moreover, the globally
the real economy. Although central
aggregated benchmark interest rate
banks and governments are expected 1000
has been slashed to decade lows and
FX forecasts
to continue supporting households
the policy environment has become
and businesses, longer-term risks
analogous to that seen during the
like corporate insolvencies and price 500
recovery from the financial crisis
uncertainties could increase stress on
in 2008.
what is already a fragile global economy.
A world abundant with liquidity, record Fitch Ratings for example predicts
0
fiscal stimulus, low interest rates and low worldwide corporate bond defaults this 20 40 60 80 100 120 140 160
inflation has generated a supportive year may surpass levels reached during
Risk management
US consumer confidence index
environment for higher yielding risk- the global recession in 2008.
There is a disconnect between stock markets and the economy. Investors
Stock market euphoria reflects remain optimistic about the economic turnaround on the horizon, but
how huge stimulus measures have the reality is far from certain. If the risk of long‑term economic damage
revived the hunt for yield, but rises, this optimism will likely fade and weigh on risk‑friendly currencies,
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signals from the real economy including Sterling, and boost safe-havens like the Japanese Yen.
suggest this confidence is misplaced. George Vessey
Currency Strategist, UK
Chart sources: Refinitiv, Western Union Business Solutions – August 2020
8
* International Labour OrgansiationTH EME 2
New ‘lower for longer’ paradigm? Global interest rates are converging
Contents
Average regional benchmark interest rates (%, unweighted)
Fighting against an economic or was once reserved for policymakers in
financial crisis is never an easy task, developed economies, has worked its
especially if the struggle is against an way around the world. 12 Europe APAC North Eurozone
invisible enemy like the coronavirus. (ex. Eurozone) America
In the wake of the increase in money
Global outlook
To soften the initial blow to their
supply, fears of inflationary pressures
respective economies, central banks
building are staging a comeback, seen
started a global and coordinated 10
by the capital inflows into inflation-
easing cycle, cutting their benchmark
protected bonds and gold (record high The most conventional monetary policy tool
rates more than 170 times since the
in August), but also a recovery of long- has lost its power. Global interest rates are
beginning of the year. But compared
term inflation expectations. Concerns converging towards the lower zero bound.
to previous crises, the impact of these 8
about high inflation in the medium
conventional policy measures are
term still seem to be overdone, given
Market themes
limited because of the magnitude of
the deflationary effects currently in
the recession and an already ultra-low
place. But this could change in the long
policy rate environment inherited from 6
term, especially with the preference
the past crisis.
for higher inflation being prevalent to
A more than two-year long trade war, erode some of the recently issued debt.
European political hurdles, the Brexit
In emerging markets, rating agencies 4
saga, and a Chinese slowdown have
have warned that the danger of
worn down policymakers. Thus, the
FX forecasts
monetary financed fiscal debt could
scope of further rate cuts and the
lead to a deterioration in confidence
margin of error were slim. Against this
and macroeconomic soundness. Given 2
backdrop, more and more central
the massive issuance of new debt and
banks leaned toward unconventional
the rise of zombie companies in the
tools and started increasing their
developed world, the efficiency and
purchases of government bonds. What 0
effectiveness of monetary policy is now
was first used by the Japanese central
in question. 2000 2004 2008 2012 2016 2020
Risk management
bank in 2001 to fight deflation, and
Zero interest rate policy (ZIRP) has now become integral and could
Negative rates and massive anchor rates at lower levels for longer. Markets are not expecting any
injections of liquidity have rate increases in the Eurozone, the US and Japan in 2021, which could
created asymmetries that could establish fiscal policy as the main driver of volatility.
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govern the behaviour of financial
markets for years to come. Boris Kovacevic
Currency Strategist, CEE
Chart sources: International Bank for Settlement Database, Western Union Business Solutions – August 2020
9TH EME 3
Today's global trade is not like 2008 Global trade outlook different this time
Contents
Annual change in trade volumes (goods & services) by country
COVID-19 highlighted unexpected and may drag on trade, like geopolitical
adverse effects of globalisation on tensions (ongoing US-China dispute),
trade. For instance, western economies distressed company balance USA China Germany UK Japan France Hong Kong South Korea Italy
are overly reliant on, and exposed to sheets after the crisis, or the likely
Global outlook
the Asian continent – especially China – reintroduction of tariffs between the EU 40%
for producing health care goods and and the UK next year. However, it will
medical materials. As a result, there’s be interesting to see how faster digital Stronger global trade Weaker global trade
now a global call from policymakers transformation, enabling increased 30% momentum into momentum into
demanding a domestic relocation services trade, could counter this stress the 2008 crisis the COVID-19 crisis
of overseas production across some in global goods trade.
strategic and mission-critical sectors. 20%
What can we learn from 2008? It's
Historically speaking, officials generally difficult to compare as the context,
Market themes
resort to inward-looking solutions pre-crisis trade momentum, and crisis
10%
during times of crisis, and it may not be itself was completely different. This
so different post-COVID. The so called time both global supply and demand
$700bn “Buy American” investment factors are at play, so the effects could
0%
plan unveiled by the Democrat’s US last longer. If the WTO considers a
presidential candidate, Joe Biden, or “V-shaped” recovery in global trade
even the reference to ‘home relocation’ as a likely scenario in 2021, it may be
-10%
used by new French PM Jean Castex overly optimistic given global demand
FX forecasts
during his introductory speech, are two could remain distressed due to higher
examples illustrating the shift towards corporate insolvencies and weaker
-20%
more protectionist policies in the purchasing power of consumers. In
short run. addition, more protectionist behaviours
could also keep trade activity near to
Beyond this global picture, we cannot -30%
its lowest level over the past 10 years.
overlook other potential hurdles that
2008 2009 2010 2019 2020*
Risk management
Unlike previous crisis, we could see a slower and uneven recovery of trade
The recovery of global trade could following COVID-19. The existing growth trajectory, and narrative around
be very gradual as protectionist protectionism is vastly different versus 2008. Furthermore, weaker global
practices are a common tool used demand caused by increasing unemployment and bankruptcies may cap
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by policymakers in the aftermath 2021 prospects.
of a crisis. Guillaume Dejean
Currency Strategist, France
Chart sources: National Customs Services & Ministry of Trade, Refinitiv, Western Union Business Solutions, 2019.
Performance based on comparison between H1 2019 and H1 2020 periods.
10TH EME 4
Transatlantic battle for dominance US Dollar facing multi-year turning point?
Contents
COVID-19 may transform currencies just like 2008
The role of the US as the undisputed As the second largest economic
financial capital of the world has region, Europe’s gaining attention. Still
shaped the 21st century. The depth of its unclear, but the recent confirmation of US Dollar nominal effective Relative US stock performance
financial markets has attracted global a joint European debt issuance could exchange rate (LHS) vs. world (RHS)
Global outlook
investors, searching for safe yield in an constitute a “Hamiltonian moment”.
ever-more yield-less world. The term refers to the first joined debt
issuance of the United States, initiated US stocks and "FX Regime change" US stocks and
Since 2010, the US stock and debt 140 the US Dollar Great Financial Crisis the US Dollar 6.5
by Treasury Secretary Alexander
markets and the US Dollar have underperform as a catalyst for a overperform
Hamilton. This step fundamentally the world trend change the world
outperformed the rest of the
changed the fiscal structure of the
world. However, confirmation of
country. Now, market participants are 6.0
Europe’s recovery plan, arguable 130
wondering whether Europe’s stimulus
US‑mismanagement of the pandemic,
Market themes
package will ignite a new EU impetus,
and the rise of China’s Renminbi,
including more coordination and 5.5
have put into question the “exorbitant
solidarity policies.
privilege” of the US currency. In 120
combination with domestic US issues The decreased short-term risk of a
like the long-lasting debate about the break-up could potentially compensate 5.0
US twin deficit, and a rise of social for the debt inflows that vanished in
unrest, investors have started to look the Eurozone after the introduction 110
for alternatives. But since 2010, it seems of negative interest rates. However, 4.5
FX forecasts
investors have failed to find a credible 2021 German elections will officialise
substitute for the greenback. Angela Merkel’s farewell, who is widely
100
considered the ‘EU’s engine’. Those 4.0
This search was also intensified by the
seeking long-term diversification out of
US-Sino trade war and rising global
US dollars will know that the Euro will
geopolitical tensions; both resulting in
be vulnerable to pre-election populist
decreased global trade and a sell-off 90 3.5
and Eurosceptic rhetoric.
of procyclical assets. 2000 2004 2008 2012 2016 2020
Risk management
The first signs of a capital rotation into risk-prone assets are emerging.
With global interest rates converging, A depreciation of the US currency will be dependent on a continuation
proper crisis management and of this trend, but COVID-19 may just trigger a major multi‑year global
economic growth differentials could FX regime change.
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overhaul the balance of power on the
world stage after the recession. Boris Kovacevic
Currency Strategist, CEE
Chart sources: Refinitiv, Western Union Business Solutions – August 2020
11TH EME 5
UK trade facing pivotal year Tariffs could upend UK-EU trade
Contents
UK exports to EU & possible tariffs under WTO rules
The UK’s role as a trading nation The EU accounted for almost 50% of
‘should’ change significantly in 2021. the UK’s total trade in goods in 2019, but
Once the Brexit transition period UK-US trade also matters. In fact, the UK exports to EU Tariff under
US is Britain’s biggest individual export in 2019 (£bn) UK exports (LHS) Average EU tariffs (RHS) WTO terms (%)
ends this year, future dealings with
Global outlook
third countries will likely be defined destination and Britain is the fourth- 20 50%
by the UK’s eventual relationship with largest destination for US exports. Thus
Europe. Yet UK-EU negotiations remain securing a free trade deal with the US
43.70%
challenging and failure to reach a may greatly benefit some sectors but
hopes of reaching a deal before US
trade deal is still a prospect, which 16 40%
elections in November have faded.
may lead to the introduction of both
tariff and non-tariff barriers next year. In the absence of a trade agreement
In a world gripped by virus-related with the EU, reverting to WTO rules
could intensify supply chain challenges.
Market themes
supply chain disruption and growth
COVID-19 imposed shocks on food 12 30%
concerns, a no‑trade deal Brexit could
exacerbate the economic shock. supply chains for example and the
rapid response of these supply chains
It is unclear whether shortening or has underscored the importance of an
diversifying supply chains would have 19.80%
open and predictable international 8 20%
helped companies avoid the blow trading environment. In a no-trade
caused by COVID-19, but many are deal scenario, supply chain resilience 14.90%
now looking at doing so in the future. will be tested further. A British cereal 11.50%
FX forecasts
Supply chains can be flexible, but it manufacturer for example, could face
4 10%
takes time to find alternative sources complicated non-tariff barriers on top
of a comparable quality. Consequently, of tariffs of 14.9%.
4.70% 2.40%
the UK will be left even more exposed if Time is running out for the UK and EU 2.50%
a trade deal isn’t agreed with Europe. to resolve their differences and the
Supply chain simplification and longer the negotiations go on, the 0 0%
‘nearshoring’ by UK firms could have more costs businesses might have to Petroleum Transport Electrical Clothing Beverages Cereals Dairy
resulted in much closer UK-EU trade equipment machinary & Tobacco products
Risk management
incur to protect themselves from a
relations in 2021. disruptive no-deal scenario.
There are currently no tariffs on trade between the UK and EU
Supply chain simplification and member states. If a UK-EU trade deal is not in place by Dec 31, 2020
‘nearshoring’ by UK firms could though, resulting barriers to trade with EU and non-EU countries could
have resulted in much closer significantly damage export and import business and derail economic
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UK‑EU trade relations in 2021. recovery hopes.
George Vessey
Currency Strategist, UK
Chart sources: UK Trade Info, ONS, WTO World Tariff Profiles, Western Union Business Solutions – August 2020
12TH EME 6
Try and isolate China Supply chain diversification hitting Chinese trade?
Contents
Measuring China’s cut of world GDP and exports
China established itself as the engine For the Chinese economy, a global
for global growth, accounting for trend of manufacturers reducing their
around 30% of world GDP (source: reliance on China could cause severe
16% Share of China in global Share of China
IMF, period 2013-2018). However, will damage in 2021. exports of merchandise in global GDP 16%
Global outlook
the world’s second largest economy Looking beyond business, China is also
maintain the position of being the suffering from a political and economic 14%
world’s main locomotive post-COVID? backlash from several of its peers who China’s share of global exports has
13%
fear the rise of its influence across the flatlined in recent years, highlighting
The supply shock following the Great
globe, whilst also condemning what 12% the world’s supply chain diversification
Lockdown of 2020 highlighted the
they consider an authoritarian regime. shift even before COVID-19 hit.
reliance of western economies on
The introduction of a new national
China, especially in the manufacturing 10%
security law in Hong Kong led US
Market themes
process. Indeed, manufacturers
officials to withdraw the former British
suffered from severe disruptions
colony’s special economic status. The
across their supply chain when 8%
recent ban of telecommunication
Chinese factories suddenly shut down
company Huawei from building its
in January. Driven by risk mitigation
British 5G network is a further example
strategies, China may now suffer 6%
of the threat that is hanging over
from a gradual decrease in foreign China: international isolation.
investments in the years ahead.
FX forecasts
However, given the high interest of 4%
Relocating some industrial production western economies in China, how much
to countries where labour costs are can the world disconnect itself from
cheaper than China, like Vietnam, such a huge market? It’s important 2%
will be considered. India is already to remember China boasts 1.3bn
increasing competition with China as it consumers and its 2021 GDP growth
offers an attractive blend of expertise forecast of +8.2% (source: IMF) looks 0%
and low costs. highly attractive in a post-crisis era. 1982 1988 1994 2000 2006 2012 2018
Risk management
If a resurgence of trade conflicts and international sanctions on China
China faces a year ahead like no dampen its post-COVID economic recovery, there will be consequences
other amidst trade protectionism, for the world economy too. Volatility in China’s currency is also a key area
global supply chain diversification, of focus, especially if China seeks to ‘revalue’ its Renminbi to support
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as well as a political backlash trade.
regarding Hong Kong. Guillaume Dejean
Currency Strategist, France
Chart sources: World Bank, Western Union Business Solutions, 2019 annual data
13TH EME 7
CEE growth model to transform? CEE’s trade openness a blessing or a curse?
Contents
Imports and exports as a share of Gross Domestic Product
Central and Eastern Europe (CEE) has The period after the Great Financial
made remarkable progress since its Crisis demonstrated the limits of
transition to market economies. The the post-transition growth model. USA
major turning point in the modern Therefore, it could get increasingly
Japan
Global outlook
economic history of the region was in harder for the region to replicate the
China
1997, when the region experienced its growth rates registered between 1997
Russia
first economic growth after the fall of and 2007, especially with the rise of
the Soviet Union. Since then, CEE has Southeast Asian exports and structural Romania
grown at double the rate of Western changes across the automotive sector.
Poland
Europe, making it an attractive place
Still, every crisis comes with risks and Latvia
to invest.
opportunities. CEE governments on Bulgaria
A unifying factor in the convergence average enjoy more fiscal freedom to Belarus
Market themes
of the CEE economies was the strong lead structural changes. The region is Estonia
emphasis on capital inflows, facilitated uniquely positioned to diversify to a Czech Rep.
by market reforms, competitive knowledge-based economy by focusing
Slovenia
wages, and low-valued currencies. on investments in innovation. The
Lithuania
These flows – largely catered to the large pool of talent and the increasing
Hungary
manufacturing base – have made the importance of the digital economy
region vulnerable to exogenous shocks. could help the region establish Slovakia
itself as a frontier market in digital CEE6 economies
FX forecasts
The geographical proximity to East Asia highly dependent on trade
transformation.
Germany and reliance on the South Asia compared to other regions.
automotive industry amplifies this Given the similar starting points and LATAM
procyclical connection. This contributes common challenges the region faces, SEA
to shaping the region as manufacturing cooperation between countries could
CEE6*
exporters with a strong bias towards unleash the potential to fully capture
Europe. The recession experienced scale effects and share best practices. 0% 40% 80% 120% 160%
after the initial COVID-19 shock stands Imports + exports as % of GDP
Risk management
as a testimony to these dependencies.
The global economic profile of most of Central and Eastern Europe has
Its growth model is at risk. Yet significantly affected the region as global trade has plummeted. CEE
fiscal freedom across Central and economies could shrink by an average of 5.4% this year before we see
Eastern Europe could just help the a 2021 counter strategy materialise.
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region establish itself as a frontier
market in digital transformation. Boris Kovacevic
Currency Strategist, CEE
Chart sources: Feenstra, Robert C., Robert Inklaar and Marcel P. Timmer (2015), “The Next Generation
of the Penn World Table”, Western Union Business Solutions – July 2020; Data from 2017;
* CEE6 = Czech Republic, Poland, Hungary, Slovakia, Bulgaria, Romania; SEA = Southeast Asia
14TH EME 8
EM currencies backed by yield Yield gap to benefit EM currencies in 2021?
Contents
Average policy rates, developed vs. emerging countries
It’s been a painful year for Emerging Firstly, we should witness a sharp
Markets so far after they experienced rebound of global growth next year,
record capital outflows during the meaning no further extension of
Developed economies Emerging economies
pandemic, losing $83.3bn in March the pandemic. If a second wave of
10%
Global outlook
alone (source IIF). When investors get COVID-19 triggers a renewed risk-off 9.5%
nervous and market volatility spikes, market, history suggests this would
EM assets are usually the first ones to clearly dampen demand for assets with
be cut across investment portfolios. a high risk/reward profile across the
Consequently, several EM currencies emerging world. 8%
collapsed this year, with some reaching 1.6x 7.5%
Secondly, debt matters. In a post- Average policy rate across EM is
record lows.
crisis environment where investors’ 20 times higher vs. developed
Yet this collapse to rock bottom could markets (as of July 2020)
confidence is frail, fundamentals will
Market themes
6.0%
eventually see a material recovery count during asset allocation decisions. 6%
in 2021 if EM currencies are ‘first in 1.7x
Investors may shun countries that
and first out’ of the crisis. Considering display high debt, a current account 4.6%
we have a near-zero interest rate deficit, and weak economic growth. 4.3%
environment across developed
4%
markets, and no rush from central While Brazil, South Africa or India’s
bankers there to tighten monetary currencies look very cheap and
attractive today, their upside potential 2.8%
conditions after the crisis, conditions
FX forecasts
could turn favourable for EM assets. will become evident as their growth 9.2x 2.0%
Offering investors a good mix of high prospects emerge. CEE currencies like 2%
returns and cheap valuations, these the Polish Zloty look less attractive from
3.5x
assets could gradually catch the eye of a yield perspective but would offer 0.8%
0.5% 20x
those in the search of yield. However, more guarantees as Eastern European
0.1%
two boxes need to be ticked in 2021 to economies could benefit from a strong
0%
make that scenario happen. recovery across Western Europe.
2000 2007 2009 2019 2020*
Risk management
While emerging currencies footed a large part of the crisis bill, they could
Will a catastrophic year be followed see a material bounce back in 2021 if global risks ease. In a near-zero
by massive inflows back into emerging interest rate environment across developed markets, higher returns and
markets? Potentially, if global growth very cheap valuations make EM currencies more attractive.
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returns and the ‘20 times’ higher rate
advantage can be maintained. Guillaume Dejean
Currency Strategist, France
Chart sources: BIS, Western Union Business Solutions - June 2020. Average rate based on monthly policy rates of
38 developed and emerging countries collected and published by the Bank for International Settlements.
15Contact us Risk management FX forecasts Market themes Global outlook Contents
SECTION 3
FX forecastsGBP / USD PA ST FU TU R E
The dollar’s rise and fall
Contents
While Brexit news has driven the Investors steered clear of the pound, After years of having relatively higher On the other hand, there aren’t many
GBP/USD rate over the last few years, concerned by the UK government’s interest rates, US rates are now in line positive catalysts driving the pound
recent price action was largely down belated reaction to the crisis and with other developed nations: near zero. either. Growing speculation about
to USD moves. GBP/USD spiked to $1.35 the dire forecasts that the UK would further UK rate cuts may limit sterling
The US Dollar might be pressured as
Global outlook
following the UK election victory late register its largest recession in 300 upside as negative interest rate policy
the tense political climate restricts
last year as investors welcomed political years. No-trade deal Brexit concerns remains in active review by the BOE.
stimulus efforts while the rise in
stability and hoped UK-EU talks would also resurfaced as the government
coronavirus cases hinders recovery Will a change of leadership in the US
become more straightforward. But the refrained from requesting an extension
hopes. Moreover, a change of be good news for the UK? Not if it
coronavirus outbreak then rippled its to the transition period.
president to the less business-friendly leads to the US-UK trade deal being
way around the world and upended
Nevertheless, the US Dollar weakened Joe Biden compared to Donald Trump, postponed. A UK-EU deal, due by
sterling’s recovery.
extensively from March onwards may also negatively impact the dollar 31 December, also remains a major
Financial markets were sent into a spin following US rate cuts and a rise of in the future. uncertainty, which has the potential to
Market themes
when governments forced nations risk-appetite among investors watching drag GBP/USD back under $1.20.
Should the dollar-weakening trend
into lockdown. Sterling was sold burgeoning signs of a strong global
continue, 2021 may allow GBP/USD to
aggressively against the safe-haven recovery.
press into the higher realms of the $1.30s.
and highly liquid US Dollar.
The pandemic-driven plunge below $1.20 Will Brexit boost or bust the pound?
FX forecasts
Historical volatility of the GBP/USD exchange rate WUBS-Oxford Economics future projections for GBP/USD
$1.43 Upper bound
$1.40
$1.40
$1.34
Risk management
A technical barrier at $1.33
$1.30
$1.28 Baseline
$1.27
$1.26
11% range
$1.20
A technical barrier at $1.20
$1.17
$1.15
$1.13 Lower bound
Contact us
$1.10 Lowest level in 35 years ($1.14)
Jan 19 Apr 19 Jul 19 Oct 19 Jan 20 Apr 20 Jul 20 Oct 20 Jan 21 Apr 21 Jul 21 Oct 21 Jan 22
Chart sources: Oxford Economics, Reuters, Western Union Business Solutions – August 2020 17GBP / EUR PA ST FU TU R E
The revival of the Euro
Contents
The pound depreciated circa 13% Investors avoided the risk-correlated The agreed stimulus package is a clear The long-lasting impact of coronavirus
against the Euro from February to pound, concerned by the UK’s growing sign of harmony amongst EU states on the economies of both the UK and
March, collapsing from a 3-year high twin deficit, the government’s handling amid the wave of Euroscepticism and the Eurozone may not be realised
near €1.21 to its lowest level in 11 years of coronavirus and ongoing Brexit- Brexit that has haunted the bloc for until late 2020 or even 2021, due to the
Global outlook
near €1.05. Despite a short period of related uncertainty. years. The ease of political divergences huge support by policymakers in both
relief, rebounding off the March floor, in Europe boosted demand for the Euro regions to help protect jobs and reduce
A surge of concerns about a “Hard
GBP/EUR steadily descended over the and GBP/EUR may continue drifting bankruptcies.
Brexit” scenario due to the persistent
summer months. lower as a result.
trade talk deadlock between the UK A no-trade deal Brexit is also a key
Sterling’s strong correlation with risk and EU underpinned huge speculative The trajectory of GBP/EUR may largely risk lingering over both regions,
sentiment led to an aggressive sell-off bets against the pound. depend on how successful the global though the UK and thus the pound is
during the height of the market turmoil, economic recovery is. Will the UK and expected to suffer more so in the short
Meanwhile, the Euro was boosted as
but since the revival of risk appetite, Europe differ in their recovery speeds run. Expectations of GBP/EUR falling
Market themes
investors cheered the EU’s historic
GBP/EUR has failed to recoup all of its and how will a potential second or towards parity in such a scenario are
€750bn rescue fund to help shore up
losses. third wave of the virus be managed by growing, particularly if it prompts a
European economies reeling from the
governments in both areas? Scottish independence referendum too.
pandemic.
Conversely, a trade deal should help
GBP/EUR climb towards €1 20.
A consistent 12% trading range over the last 3 years To parity or above €1.20?
FX forecasts
Historical volatility of the GBP/EUR exchange rate WUBS-Oxford Economics future projections for GBP/EUR*
€1.43 Upper bound
€1.40 €1.35
Risk management
€1.30 €1.25
A technical ceiling at €1.20
€1.20
€1.12 €1.13 Baseline
€1.11
12% range
€1.10
A technical floor at €1.07 €0.99
€1.00
Lowest level in
5 years (€1.05) €0.93
Contact us
€0.89 Lower bound
€.90
Jan 19 Apr 19 Jul 19 Oct 19 Jan 20 Apr 20 Jul 20 Oct 20 Jan 21 Apr 21 Jul 21 Oct 21 Jan 22
Chart sources: Oxford Economics, Reuters, Western Union Business Solutions – August 2020 * GBP/EUR projections calculated through projections on EUR/USD and GBP/USD rates 18GBP / AUD PA ST FU TU R E
Restored appetite for Aussie
Contents
Over the past three years, the pound The March 2020 peak was partly The trajectory of GBP/AUD largely China is embroiled in several economic
has steadily climbed against the a result of the pandemic-induced depends on whether a second or and geopolitical disputes, including
Australian Dollar, but 2019 and 2020 economic slowdown in China. third wave of coronavirus scuppers with the UK and Australia. An
gains were wiped out in just four Commodity prices also plunged in line economic recovery hopes and sparks escalation of these disputes could lead
Global outlook
months. GBP/AUD peaked at A$2.08 with global demand that subsequently risk aversion across financial markets. to economic sanctions which would
during the height of the pandemic- dried up under lockdown policy. Historically, the AUD outperforms pose a serious threat to Australia’s
induced market turmoil in March the pound during times of economic recovery hopes.
However, the GBP/AUD exchange
before falling 15% in just one quarter. recovery.
rate staged a sharp U-turn in line In late summer, GBP/AUD bounced
Prior to the pandemic, the exchange with global stock markets as risk If financial markets reel in the event of from a long-term support floor around
rate had been influenced by growing appetite resurfaced. Commodity a new round of lockdown measures, the A$1.77 mark, largely in line with
US-China trade tensions due to prices recovered which strengthened then investors may ditch high yielding renewed and stringent restrictions in
Australia’s strong trade links with China. AUD. Also, investors sought out higher assets, including the Aussie dollar. As Australia following a rise in virus cases.
Market themes
The Australian currency is a proxy yielding assets such as Australian per the trend in March, GBP/AUD may A break of the A$1.75 technical barrier
for both the Chinese economy and government bonds. drift higher as a result. would signal more potential downside
commodity prices. risk for the exchange rate.
Risk reversal revives Aussie Will a global recovery drag on GBP/AUD?
FX forecasts
Historical volatility of the GBP/AUD exchange rate WUBS-Oxford Economics future projections for GBP/AUD*
A$2.35 A$2.26 Upper bound
A$2.20
4-year high A$2.12
A$2.15
A technical barrier at A$2.00
Risk management
A$1.95 14% range
A$1.81 A$1.81 A$1.81 Baseline
A$1.75
A technical barrier at A$1.75
A$1.52
A$1.55
A$1.46
A$1.41 Lower bound
Contact us
A$1.35
Jan 19 Apr 19 Jul 19 Oct 19 Jan 20 Apr 20 Jul 20 Oct 20 Jan 21 Apr 21 Jul 21 Oct 21 Jan 22
Chart sources: Oxford Economics, Reuters, Western Union Business Solutions – August 2020 * GBP/AUD projections calculated through projections on AUD/USD and GBP/USD rates 19EUR / USD PA ST FU TU R E
A durable uptrend?
Contents
EUR/USD has seen a sharp increase in Another shift in sentiment was seen as A positive summer period peaked with save jobs and restrain bankruptcies.
activity in 2020 and appears to have the US was hit with a new large wave the conclusion of an historical deal by However, belated effects could pop up
reversed the downtrend started in of infections over the summer months, European leaders on a €750bn stimulus in late 2020 or early 2021 and dampen
2018. After falling to a three-year low replacing Europe as the area the most plan. Yet there is no guarantee the confidence in the Euro.
Global outlook
in March when the pandemic crisis impacted by the coronavirus. Euro’s climb will continue or at what
For the US Dollar, a switch of president
peaked in Europe, EUR/USD roared pace.
The effective management of the crisis, to the less business friendly Joe Biden
back during spring and climbed by 10%
which appears to be under control The trajectory of EUR/USD mainly compared to Donald Trump may
in just three months.
in Europe, coupled with the bold depends on two factors: 1) which of the negatively impact the US currency,
The exchange rate flirted with the $1.15 response by European officials in terms US and Europe will better manage the amid a likely sell-off in US equities.
barrier over the summer, a ceiling that of economic stimulus, contributed crisis, especially in case of second or
German elections in 2021 will also be an
had held since January 2019. Once to a revival of confidence towards third waves, and 2) which will recover
important turning point for currencies.
this level was broken, EUR/USD was European assets, which fueled appetite the fastest.
Market themes
Investors will scrutinise Angela Merkel's
catapulted to fresh two-year highs for the Euro. In contrast, the greenback
The economic damage in Europe successor after her fourth consecutive
($1.20) in another sign of improving was hurt by political deadlock in US
has been cushioned thanks to the and final term in charge.
sentiment towards the Euro. Congress over a new stimulus plan.
huge support from policymakers to
An aggressive breakout higher Upside momentum facing many hurdles
FX forecasts
Historical volatility of the EUR/USD rate WUBS-Oxford Economics future projections for EUR/USD
$1.27 Upper bound
$1.24
$1.25
Downward trend since Feb. 2018 +10% (3 months) $1.19
Risk management
$1.13 $1.14 $1.14 Baseline
$1.15
$1.07
$1.05 $1.03
Lowest level in 3 years $1.00 Lower bound
Contact us
$0.95
Jan 19 Apr 19 Jul 19 Oct 19 Jan 20 Apr 20 Jul 20 Oct 20 Jan 21 Apr 21 Jul 21 Oct 21 Jan 22
Chart sources: Oxford Economics, Reuters, Western Union Business Solutions – August 2020 20Contact us Risk management FX forecasts Market themes Global outlook Contents
SECTION 4
Risk managementRISK MANAGEMENT
Protecting profits post-crisis
Contents
Corporate risk managers face face amid increased volatility and
challenges unlike any since the uncertainty in timing of payments for
financial crisis of 2008. After goods and services.
Global outlook
decades of steady growth in global
While there is no one size fits all
GDP and relatively low levels of
approach to FX risk management,
financial market volatility, treasury
the overarching objective to achieve
professionals and business owners
cash flow certainty and protect
find themselves in a new paradigm
profits from the effects of FX rate
as the effects from COVID continue
movements remain the same.
to ripple through both financial
Market themes
markets and global supply chains. Looking ahead into 2021, it is
important that decision makers stay
While FX volatility stemming
focused on the basic building blocks
from fundamental forces such as
of hedge strategy development, and
loose monetary policy, negative
that throughout the year, tactics
real interest rates and rising
employed are regularly reviewed to
commodity prices continue to be
ensure that your company’s FX risk
topics discussed among cerebral
management objectives continue to
FX forecasts
academics and the financial press,
be met.
rarely does one hear about the
challenges corporate practitioners
Risk management
Rarely does one hear about the
challenges corporate practitioners
face amid increased volatility and
uncertainty in timing of payments
David Renta
Contact us
for goods and services. Global Head of Hedging
22RISK MANAGEMENT
Considerations
Contents
A currency risk management strategy could reduce the possibility of This broader approach is especially critical amidst the COVID-19 post-
unexpected financial losses, make future cash flows more predictable, pandemic market outlook.
Global outlook
and potentially provide a competitive advantage against others who
In addition, uncertainty around underlying cash flow exposures caused
may leave themselves exposed to currency risk.
by the pandemic create separate challenges for risk managers, as
However, any strategy is not simply a collection of financial products critical terms like timing and amounts to hedge can change in an instant
that can be used to address specific exposures. Instead, success lies in should supply chain disruption or changes to underlying demand for
building an end to end approach and risk mitigation culture, taking a goods or services occur.
holistic and more disciplined approach to managing currency exposures.
Market themes
1 Identify currency exposures 2 Set your 2021 goals 3 Develop your hedging strategy
Using our tools like the WU® EDGE Platform, Review the three common goals businesses We can then tailor a bespoke hedging
we can help you: like yours usually have: strategy to help you meet your goals:
FX forecasts
• Get full visibility over your future FX • Protect profits from adverse currency • Set a minimum hedging threshold so
payments and exposures. swings. your profits are not left exposed.
• Accurately and easily forecast your • Participate and benefit from favourable • Using market and industry insights,
foreign cash flows. currency moves. benchmark your strategy against best
• Calculate your currency risk against • Enhance, outperform competitors or practices and scenarios.
potential market scenarios. achieve specific targets.
Risk management
Protect 100
50%
75
Participate 50
30%
25
0
Enhance
20% 1-3 months 4–6 months
Contact us
75% hedged 50% hedged
23RISK MANAGEMENT
Considerations
Contents
Although the objective of any risk management and hedging strategy is At Western Union Business Solutions, we are dedicated to helping
easy to state, the challenge is to develop and execute the plan in such a companies manage these complexities and achieve their international
Global outlook
volatile and highly responsive environment. business goals.
It is more important than ever that companies, especially SMEs, find Our simple three step approach to risk mitigation is designed to offer
partners to help them craft, benchmark and validate strategies against decision makers and their advisors with unique insights, enabling
best practices, and provide specialist insights into how current events are smarter strategy development around trade and risk management,
reshaping the foreign exchange payments landscape. and ultimately better financial outcomes.
Market themes
Without a strategy Mitigate your risk With a strategy
• Volatile cash flows and profits • Forwards – Protect • Predictable cash flows and profits
FX forecasts
• Difficult forecasting • Options* – Protect & Benefit • Reliable forecasting
• Chase exchange rates, leave your • SPOT – Top up • More control over costs, not worrying
business exposed about rates
• Market Orders – Target preferential rates
Risk management
Cash flow Cash flow
FORWARDS OPTIONS
SPOT MARKET ORDERS
VOLATILE PREDICTABLE
Contact us
* These alternative hedging products allow you to lock in a rate of exchange to protect your profits, and give you the ability to benefit if the market moves in your favour. There are disadvantages to consider such as a
slightly less favourable protection rate versus a comparable Forward, but please speak to our hedging experts to understand more about the costs and benefits which can vary with each Options product. 24Are you ready for 2021?
Contact us now to review your strategy
Get started >
Learn more here:
business.westernunion.com/en-gb/blogAbout us
Contents
Western Union pioneered the idea of moving money around the world Western Union Business Solutions is transforming how businesses can
and has been connecting people globally for more than a century. As expand globally through one of the largest and most diverse payment
Global outlook
one of the world’s leading providers of cross-border business payments, networks in the world.
Market themes
Small businesses Corporate Financial institutions Legal Educational institutions NGOs
FX forecasts
WU® EDGE International Payments Risk Management
• Connect with partners • Incoming • Hedge specialists
• Real time, fee free* • Outgoing • Improve cash flow
Risk management
• Visibility into exposures • Mass payments • Help protect profits
Global Payment 200 Countries
Bank Account Cash Card Mobile* 130 Currencies
Network and Territories
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* Transaction fee-free EDGE Network Payment services are available between fully accredited customers that have registered to use the WU® EDGE platform and are authorised by a WUBS affiliate to access services in
Australia, Austria, Canada, Czech Republic, France, Germany, Hong Kong, Italy, Malta, New Zealand, Poland, Singapore, Switzerland, United Kingdom, and USA. WUBS will apply a foreign currency exchange rate, which
includes a margin set by WUBS, whenever a transaction includes a currency conversion. Transaction fees may also apply to transactions other than EDGE Network Payment services. 26Western Union Business Solutions (WUBS) has based Risk Disclosure Statements For a complete listing of US state licensing, visit services in Germany through Western Union’s wholly- Poland
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