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FX Atlas
January 12, 2021
Table of Contents
Global recovery should continue to push the euro higher .............................................................................................................................................. 1
Overview .............................................................................................................................................................................................................................. 4
Swiss franc | CHF ............................................................................................................................................................................................................... 6
Euro | EUR ........................................................................................................................................................................................................................... 8
US dollar | USD ................................................................................................................................................................................................................. 10
Pound sterling | GBP ........................................................................................................................................................................................................ 12
Japanese yen | JPY ........................................................................................................................................................................................................... 14
Gold | XAU ......................................................................................................................................................................................................................... 16
Disclaimer ......................................................................................................................................................................................................................... 18
Global recovery should continue to push the euro higher
Dr. Claudio Wewel The progressing roll-out of vaccine schemes should accelerate the global economic
FX Strategist recovery and has reinforced our positive view on cyclical currencies and in particular
claudio.wewel@jsafrasarasin.com the euro. The Japanese yen, the Swiss franc and gold should hold up well despite
+41 58 317 32 26 waning safe-haven demand, while the post-Brexit growth prospects for the UK econ-
omy look muted and should weigh on the pound sterling.
Throughout 2020, the euro rose by 10% Characterised by elevated FX volatility, the year 2020 stood in stark contrast to previous
against the US dollar and by 7% in trade- years when currencies moves were rather subdued. Cyclical currencies represented the larg-
weighted terms est beneficiaries in 2020 with the Swedish krona (SEK) and the euro (EUR) leading the space
of G10 currencies (Exhibit 1). Throughout 2020, the euro appreciated by almost 10% against
the US dollar, while the currency’s nominal effective exchange rate (NEER) rose by almost
7%. On the other side of the spectrum, the US dollar (USD) declined by 3% on a trade
weighted basis, leaving the Greenback the bottom performer in 2020.
Cyclical currencies outperformed in 2020, Exhibit 1: Swedish krona and euro led as the top performing currencies in 2020
leaving the US dollar behind
Source: Macrobond, J. Safra Sarasin, 11.01.2021
Throughout 2021, the US dollar should con- Though overwhelming consensus, we expect this trend to continue into the current year. Our
tinue on its multi-year downward trend key conviction remains that the US dollar has embarked on a multi-year downward trend af-
ter it had reached its peak amid last year’s March sell-off in risk assets. The global recovery
should continue to drive this development, as a pick-up in the vaccination campaign should
allow authorities to loosen restrictions later this year. Moreover, in the past, higher twin defi-
cits have coincided with dollar weakness. The Georgia run-off elections have yielded a de fac-
to «blue wave», which has made the enactment of further large-scale fiscal relief ever more
likely. The latter should support high inflation expectations and hence continue to depress
real yields, which should continue to act as a headwind to the dollar.
1 | FX Atlas | Overview Contacts: Claudio Wewel, +41 58 317 3226, claudio.wewel@jsafrasarasin.com
Karsten Junius, +41 58 317 3283, karsten.junius@jsafrasarasin.comGlobal recovery should continue to push the euro higher
The euro should strongly benefit from the In turn, the prospects of more US fiscal stimulus constitute a vastly positive signal for the eu-
accelerated recovery and the prospect of ro as the currency should particularly benefit from the expected acceleration in the global
more larger-scale stimulus in the US economic recovery, given its cyclical nature (Exhibit 2). And the currency’s historical co-
movement with the Chinese credit cycle suggests that the euro rally should continue to have
legs to run over the coming months (Exhibit 3). Furthermore, the progress on the vaccination
front should allow a re-opening of the tourism sector, which is of particular importance to the
economy of Europe’s south. Hence, we would expect a front-loaded euro rally during the first
half of this year. What’s more, the narrow EUR-USD real yield differential should warrant an
environment in which the aforementioned dollar-negative drivers will continue to kick in,
making a sustained period of EUR-USD weakness rather unlikely. Instead, lower euro area in-
flation along with the recovery should catalyse a partial reversal of the 2014-18 outflows,
which would be an additional tailwind for the European common currency.
Exhibit 2: Euro should benefit from recovery Exhibit 3: China credit cycle leads EUR-USD Exhibit 4: Our model suggests CAD upside
Source: Macrobond, J. Safra Sarasin, 11.01.2021 Source: Macrobond, J. Safra Sarasin, 11.01.2021 Source: Macrobond, J. Safra Sarasin, 11.01.2021
Canadian dollar should benefit from the The global economic recovery should also strengthen commodity currencies. In particular, we
commodity cycle favour the Canadian dollar (CAD). Based on the current yield differential and oil price level,
our model would justify the currency to appreciate against the US dollar (Exhibit 4). Further-
more, Canada has managed to keep its curve of daily Covid-19 infections substantially flatter
than most other developed countries, which might require relatively less fiscal stimulus and
give the currency a further edge.
Swiss franc, Japanese yen and gold to hold Despite waning safe-haven demand, we should see both the Swiss franc and the Japanese
up well despite waning safe-haven demand yen appreciating further against the US dollar – primarily on the back of lower inflation expec-
tations. Gold should see some consolidation throughout 1H21. Yet the revival of physical
demand should partly offset headwinds from waning safe-haven demand and the gradual in-
crease of real yields. Hence, we expect the precious metal to remain well-supported at ele-
vated levels throughout 2021.
Pound Sterling moved only little upon the Last, but not least, the negotiations on the post-Brexit trade agreement finally concluded with
conclusion of the UK-EU trade deal a last-minute deal announced on Christmas Eve. As we noted recently, the British pound
largely priced the conclusion of the deal in the weeks ahead and hence the currency barely
reacted to the eventual announcement. GBP-USD mostly traded within a tight range between
1.35 and 1.37, whereas EUR-GBP fluctuated around 0.90. But while the currency held up
well to the new reality so far, the risks remain tilted to the downside.
2 | FX Atlas | OverviewGlobal recovery should continue to push the euro higher
A muted growth outlook and the possibility of Though the «no deal» outcome was averted, the narrow scope of the UK-EU agreement im-
a BoE rate cut in 1Q21 should weigh on the plies that the country leaves the EU substantially less integrated with its common market.
British currency Most estimates suggest that, in the long term, the UK economy will end up 4% smaller than it
would otherwise have been. Near-term, disruptions at the border will probably weigh on the
economic recovery too. Additionally, the UK economy has been more heavily impacted than
the remainder of Europe: An aggressively spreading virus mutation has necessitated a re-
newed strict lockdown. Scheduled until March 31st (with a review in mid-February), the lock-
down should constitute a further drag on growth. In our view, the combination of these devel-
opments will induce the Bank of England (BoE) to deliver more quantitative easing and a po-
tential rate cut in 1Q21, representing another near-term headwind to the British currency
(Exhibits 5 and 6).
A weaker pound would increase the competi- Longer term, a weaker pound should induce higher imported inflation and worsen the UK’s
tiveness of the UK economy terms of trade, while increasing the competitiveness of the UK economy. Moreover, this
would lead to a shift of capital and jobs into goods exports and potentially compensate for
the loss of tradable service activity. According to the IMF External Sector Report 2020, cur-
rent account sustainability would justify a real devaluation by 7% (Exhibit 7). And the Brexit-
induced loss in the trade of services would suggest that the valuation gap has grown even
further. In consequence, we reinstate our view that we are unlikely to see a meaningful GBP
rebound in the foreseeable future.
Exhibit 5: UK growth outlook is subdued Exhibit 6: BoE rate cut would push GBP lower Exhibit 7: GBP downside also in real terms
0.7 150 Under-/overvaluation in real terms, %
100 Staff estimates based on current account sustainability
0.8 15
50 11.0
0 10 7.1 7.5
0.9
-50 5
0.0
1.0 -100 0
-150
-5 -2.8
1.1 -200 -4.0 -3.5
2012 2014 2016 2018 2020 -10
-10.0
EUR-GBP, reversed, lhs -15
BB Brexit Barometer/Bliss Index, rhs SEK AUD CHF EUR JPY CAD GBP USD
Source: Bloomberg, J. Safra Sarasin, 11.01.2021 Source: Macrobond, J. Safra Sarasin, 11.01.2021 Source: IMF, J. Safra Sarasin, 11.01.2021
3 | FX Atlas | OverviewOverview
Overview
Our view & major differences to the Bloomberg consensus
More EUR bullish: The roll-out of vaccine schemes should accelerate the global recovery and hence allow for a quicker rebound of the Eu-
ropean tourism sector. Moreover, the Chinese credit cycle suggests that the euro rally should continue to have legs to run over the coming
months. Low euro area inflation and the diminished dollar yield advantage should warrant longer-term euro strength.
More USD bearish: The global economic recovery should continue to act as a headwind to the anti-cyclical dollar. Moreover, the Demo-
crats’ victory in both houses of Congress has substantially increased the odds of more large-scale fiscal relief in the near term. These
should keep inflation expectations high, real yields depressed and continue to weaken the dollar into 2021.
More CHF bullish: We expect CHF to remain strong in spite of the global economic recovery. The Swiss economy’s strong resilience to the
crisis and highly attractive real yields should continue to give CHF a relative edge. Yet a stronger euro will allow the SNB to scale back their
interventions in the FX market. We predict EURCHF at 1.08 towards 4Q21.
Forecasts
BJSS forecasts Consensus FX forwards
CHF 11-Jan 1Q21 2Q21 3Q21 4Q21 4Q21 4Q21
USDCHF 0.89 0.87 0.84 0.84 0.83 0.89 0.88
EURCHF 1.08 1.08 1.08 1.08 1.08 1.10 1.08
GBPCHF 1.20 1.16 1.16 1.16 1.16 1.21 1.19
CHFJPY 117 118 120 120 120 116 118
USD 11-Jan 1Q21 2Q21 3Q21 4Q21 4Q21 4Q21
EURUSD 1.22 1.25 1.28 1.29 1.30 1.24 1.23
GBPUSD 1.35 1.34 1.38 1.39 1.40 1.36 1.35
USDJPY 104 102 102 101 100 103 104
USDCNY 6.48 6.45 6.43 6.42 6.40 6.40 6.59
EUR 11-Jan 1Q21 2Q21 3Q21 4Q21 4Q21 4Q21
EURGBP 0.90 0.93 0.93 0.93 0.93 0.91 0.91
EURJPY 127 128 130 130 130 128 127
Source: Bloomberg, Bank J. Safra Sarasin
Positioning
CFTC COT net speculative positions thousand contracts
2.0 2y z-score Net positions 300
1.5
250
1.0
200
0.5
0.0 150
-0.5 100
-1.0
50
-1.5
0
-2.0
-2.5 -50
AUD CAD EUR JPY NZD CHF GBP DXY Gold
Source: Bloomberg, Bank J. Safra Sarasin
4 | FX Atlas | OverviewOverview
Performance
1m and 3m performance nominal trade weighted FX indices, % 1y and ytd performance nominal trade weighted FX indices, %
NOK NOK
AUD AUD
SEK CAD
GBP NZD
NZD USD
EUR EUR
CAD GBP
CHF CHF
JPY SEK
USD JPY
-4 -2 0 2 4 6 -4 -2 0 2 4 6 8 10
1m 3m ytd 12m
Source: Bloomberg, Bank J. Safra Sarasin Source: Bloomberg, Bank J. Safra Sarasin
Sentiment
Relative Strength Index (RSI) vs USD 3- and 12-month risk reversals (RR)
80 USDNOK
70 USDSEK
59 60 60 61
57
60 USDCAD
47 EURUSD
50 42 43
39
40 USDCHF
GBPUSD
30
USDJPY
20
NZDUSD
10
AUDUSD
0
EUR CHF JPY GBP SEK NOK AUD NZD CAD -2.0 -1.0 0.0 1.0 2.0 3.0
RSI overbought vs USD oversold vs USD 25D3M RR 25D1Y RR
Source: Bloomberg, Bank J. Safra Sarasin Source: Bloomberg, Bank J. Safra Sarasin
The Relative Strength Index (RSI) indicates whether a currency is overbought or oversold The price of a risk reversal (RR) indicates whether the market is bullish or bearish on a
and is calculated according to the following formula: cur-rency pair and is calculated according to the following formula:
RSI = avg_up / (avg_up + avg_down), where RR_25 = Vol_Call,25 – Vol_Put,25, where
avg_up denotes the average return on days with a positive day-return and Vol_Call,25 denotes the implied volatility of a call option with a delta of 25% and
avg_down denotes the average return on days with a negative day-return Vol_Put,25 denotes the implied volatility of a put option with a delta of -25%
RSIs below 30/above 70 indicate oversold/overbought situations. Positive values indicate that the market expects a higher future spot rate and vice versa.
Valuation
PPP-implied valuation vs USD, % IMF assessed fair value gap, based on current account sustainability
NOK JPY GBP CAD SEK AUD EUR NZD CHF Deviation of real effective exchange rate from IMF «fair value», %
0 12 11
-2
10 9
-4 7 8
8
-6
6
-8
4
-10
-12 2 1
0
-14 0
-16 -2
-2
-18 -2
-4
-20 11-Jan-21 31-Dec-19
SEK JPY CHF EUR USD GBP CAD AUD
Source: Macrobond, Bank J. Safra Sarasin Source: Bloomberg, IMF, Bank J. Safra Sarasin
5 | FX Atlas | OverviewSwiss franc | CHF
January 12, 2021
Key view: CHF to remain strong despite waning safe-haven demand
Improving risk sentiment throughout 2H20 strengthened the euro, which substantially reduced appreciation pressure on the Swiss cur-
rency and allowed the SNB to cut its interventions at the FX market markedly. In spite of Switzerland’s recent designation as a «currency
manipulator», we would expect the SNB to resume its operations should virus-related news flows worsen again. Politically sensitive rate
cuts seem to be off the table.
Short term: Risk reversals continue to point towards a stronger CHF though sentiment is not excessive.
Medium term: Despite the progressing global recovery, we expect the Swiss currency to remain strong on the back of the high crisis-
resilience of the Swiss economy and the currency’s real yield advantage vs USD and EUR. Our conviction is that EURCHF should mainly
fluctuate around the 1.08 level throughout 2021 and the SNB will intervene forcefully once EURCHF drops below 1.05.
Long term: We expect CHF appreciation to persist on the back of continued relative structural advantages along with a strong internation-
al net investment position and high current account surpluses.
Forecast BJSS 11-Jan 1Q21 2Q21 3Q21 4Q21 Performance (%) 1w 1m 3m 6m 12m ytd
EURCHF 1.08 1.08 1.08 1.08 1.08 EURCHF 0.3 0.5 0.6 1.8 0.1 0.2
USDCHF 0.89 0.87 0.84 0.84 0.83 USDCHF 1.0 0.0 -2.3 -5.4 -8.5 0.6
GBPCHF 1.20 1.16 1.16 1.16 1.16 GBPCHF 0.4 2.1 1.2 1.1 -5.5 -0.7
CHF NEER 100.0 100.6 101.2 101.3 101.5 CHF NEER -0.3 -0.3 -0.2 -0.1 3.9 -0.5
Source: Bloomberg, Bank J. Safra Sarasin Source: Bloomberg, Bank J. Safra Sarasin
FX development
Key crosses Nominal and real effective exchange rates
1.80 140
1.60 130
1.40 120
1.20 110
1.00 100
0.80 90
0.60 80
2010 2012 2014 2016 2018 2020 2010 2012 2014 2016 2018 2020
EURCHF USDCHF GBPCHF CHF NEER CHF REER
Source: Bloomberg, Bank J. Safra Sarasin Source: Bloomberg, Bank J. Safra Sarasin
Cyclical position of Switzerland
GDP growth & outlook Inflation & monetary policy
70 15 1.5
65
10 1.0
60
5 0.5
55
50 0 0.0
45
-5 -0.5
40
-10 -1.0
35
30 -15 -1.5
2010 2012 2014 2016 2018 2020 2010 2012 2014 2016 2018 2020
Markit manufacturing PMI, lhs Industrial production, % yoy, rhs
Key central bank policy rate, % Core CPI, % yoy
Real GDP, % yoy, rhs
Source: Macrobond, Bank J. Safra Sarasin Source: Macrobond, Bank J. Safra Sarasin
6 | Swiss franc | CHFSwiss franc | CHF
January 12, 2021
Short term factors & sentiment
Relative strength index 3- and 12-month risk reversals
90 0.0
80
-0.5
70
60
-1.0
50
40 -1.5
30
-2.0
20
10
-2.5
0
Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 -3.0
Jan-19 Jul-19 Jan-20 Jul-20 Jan-21
EURCHF RSI 14d RSI > 70: CHF oversold
RSI < 30: CHF overbought EURCHF 25D3M RR, lhs EURCHF 25D1Y RR, lhs
Source: Bloomberg, Bank J. Safra Sarasin Source: Bloomberg, Bank J. Safra Sarasin
The Relative Strength Index (RSI) indicates whether a currency is overbought or oversold The price of a risk reversal (RR) indicates whether the market is bullish or bearish on a
and is calculated according to the following formula: currency pair and is calculated according to the following formula:
RSI = avg_up / (avg_up + avg_down), where RR_25 = Vol_Call,25 – Vol_Put,25, where
avg_up denotes the average return on days with a positive day-return and Vol_Call,25 denotes the implied volatility of a call option with a delta of 25% and
avg_down denotes the average return on days with a negative day-return Vol_Put,25 denotes the implied volatility of a put option with a delta of -25%
RSIs below 30/above 70 indicate oversold/overbought situations. Positive values indicate that the market expects a higher future spot rate and vice versa.
Medium term factors
Real rates SNB FX policy
1.00 1.30 6 1.00
0.50 1.25
4 1.05
0.00 1.20
-0.50 1.15 2 1.10
-1.00 1.10
0 1.15
-1.50 1.05
-2.00 1.00 -2 1.20
2011 2013 2015 2017 2019 2021 2016 2017 2018 2019 2020 2021
EUR-CHF 10y real yield differential, lhs EURCHF spot, rhs SNB sight deposits, weekly abs change in CHF bn, lhs EURCHF spot, rhs
Source: Macrobond, Bank J. Safra Sarasin Source: Macrobond, Bank J. Safra Sarasin
Long term factors
Imbalances: Switzerland Valuation: Purchasing power parity
External imbalances 2017 2018 2019 2020 2.00
Current account balance, % GDP 7.0 9.0 11.4 n/a
1.80
Net international position, % GDP 123.5 121.8 112.6 n/a
1.60
Internal imbalances 2017 2018 2019 2020
1.40
Real house prices, % yoy 1.8 -1.0 1.5 n/a
Private sector debt, % GDP 239.3 239.1 246.9 n/a 1.20
Government debt, % GDP 42.7 41.0 42.1 48.7
1.00
0.80
2006 2008 2010 2012 2014 2016 2018 2020
EURCHF spot EURCHF PPP-implied –/+10%
Source: Bloomberg, IMF, Refinitiv, Bank J. Safra Sarasin Source: Macrobond, Bank J. Safra Sarasin
7 | Swiss franc | CHFEuro | EUR
January 12, 2021
Key view: Economic recovery and low inflation should catalyse further EUR upside
The EU’s political commitment towards a joint EU recovery fund has substantially reduced political uncertainty weighing on the European
common currency and hence pushed the currency higher. The roll-out of vaccine schemes should accelerate the global recovery and
hence allow for a quicker rebound of the European tourism sector. Moreover, the Chinese credit cycle suggests that the euro rally should
continue to have legs to run over the coming months.
Short term: Given the re-imposition of strict lockdowns in many euro area economies, near-term data should rather disappoint, which
constitutes a near-term risk. Yet, markets will likely look through the coming weeks and focus on the recovery story.
Medium term: EUR to be pushed higher versus USD on the back of lower inflation expectations for the euro area. The Democratic majority
in both houses of Congress will likely enact further large-scale stimulus, which along with the progressing recovery should catalyse a
front-loaded euro rally in 1H21.
Long term: We expect EURUSD to appreciate towards 1.30 until year-end. Particularly the diminished dollar real yield advantage should
warrant longer-term euro strength.
Forecast BJSS 11-Jan 1Q21 2Q21 3Q21 4Q21 Performance (%) 1w 1m 3m 6m 12m ytd
EURUSD 1.22 1.25 1.28 1.29 1.30 EURUSD -0.7 0.4 2.9 7.7 9.4 -0.4
EURCHF 1.08 1.08 1.08 1.08 1.08 EURCHF 0.3 0.5 0.6 1.8 0.1 0.2
EURGBP 0.90 0.93 0.93 0.93 0.93 EURGBP -0.1 -1.6 -0.6 0.7 5.9 0.9
EUR NEER 100.0 101.5 102.5 102.7 102.9 EUR NEER 0.1 0.3 0.5 2.9 7.4 -0.3
Source: Bloomberg, Bank J. Safra Sarasin Source: Bloomberg, Bank J. Safra Sarasin
FX development
Key crosses Nominal and real effective exchange rates
1.80 120
1.60
110
1.40
1.20 100
1.00
90
0.80
0.60 80
2010 2012 2014 2016 2018 2020 2010 2012 2014 2016 2018 2020
EURUSD EURCHF EURGBP EUR NEER EUR REER
Source: Bloomberg, Bank J. Safra Sarasin Source: Bloomberg, Bank J. Safra Sarasin
Cyclical position of the euro area
GDP growth & outlook Inflation & monetary policy
70 15 2.5
65 10
2.0
5
60
0
1.5
55 -5
50 -10 1.0
45 -15
0.5
-20
40
-25
0.0
35 -30
30 -35 -0.5
2010 2012 2014 2016 2018 2020 2010 2012 2014 2016 2018 2020
Markit manufacturing PMI, lhs Industrial production, % yoy, rhs
Key central bank policy rate, % Core CPI, % yoy
Real GDP, % yoy, rhs
Source: Macrobond, Bank J. Safra Sarasin Source: Macrobond, Bank J. Safra Sarasin
8 | Euro | EUREuro | EUR
January 12, 2021
Short term factors & sentiment
Relative strength index 3- and 12-month risk reversals
90 3.0
80
2.0
70
60 1.0
50 0.0
40
30 -1.0
20 -2.0
10
-3.0
0
Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 -4.0
Jan-19 Jul-19 Jan-20 Jul-20 Jan-21
EURUSD RSI 14d RSI > 70: EUR overbought
RSI < 30: EUR oversold EURUSD 25D3M RR, lhs EURUSD 25D1Y RR, lhs
Source: Bloomberg, Bank J. Safra Sarasin Source: Bloomberg, Bank J. Safra Sarasin
The relative strength index (RSI) indicates whether a currency is overbought or oversold The price of a risk reversal (RR) indicates whether the market is bullish or bearish on a
and is calculated according to the following formula: currency pair and is calculated according to the following formula:
RSI = avg_up / (avg_up + avg_down), where RR_25 = Vol_Call,25 – Vol_Put,25, where
avg_up denotes the average return on days with a positive day-return and Vol_Call,25 denotes the implied volatility of a call option with a delta of 25% and
avg_down denotes the average return on days with a negative day-return Vol_Put,25 denotes the implied volatility of a put option with a delta of -25%
RSIs below 30/above 70 indicate oversold/overbought situations. Positive values indicate that the market expects a higher future spot rate and vice versa.
Medium term factors
Real rates Euro area political uncertainty
2.00 1.60 80 1.00
1.50
1.50
1.00 1.10
60
0.50 1.40
1.20
0.00
1.30 40
-0.50
1.30
-1.00 1.20
-1.50 20
1.40
1.10
-2.00
-2.50 1.00 0 1.50
2011 2013 2015 2017 2019 2021 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
EUR-USD 10y real yield differential, lhs EURUSD spot, rhs The Sentix Euro Break-up Index, lhs EURUSD spot, rhs
Source: Macrobond, Bank J. Safra Sarasin Source: Bloomberg, Bank J. Safra Sarasin
Long term factors
Imbalances: Euro area Valuation: Purchasing power parity
External imbalances 2017 2018 2019 2020 1.80
Current account balance, % GDP 3.2 2.9 2.3 n/a
1.60
Net international position, % GDP -7.9 -4.1 0.0 n/a
1.40
Internal imbalances 2017 2018 2019 2020
1.20
Real house prices, % yoy 3.1 2.8 3.2 n/a
Private sector debt, % GDP 164.6 164.4 163.9 n/a 1.00
Government debt, % GDP 87.6 85.7 84.0 101.1
0.80
0.60
2006 2008 2010 2012 2014 2016 2018 2020
EURUSD spot EURUSD PPP-implied –/+10%
Source: Bloomberg, IMF, Refinitiv, Bank J. Safra Sarasin Source: Macrobond, Bank J. Safra Sarasin
9 | Euro | EURUS dollar | USD
January 12, 2021
Key view: Expect longer-term USD downward trend to stay intact
The dollar yield advantage that has kept the currency strong in the past years has largely vanished and with the Fed’s aggressive re-
sponse to the Covid-19 flight-to-safety seen during the sell-off in spring, dollar scarcity should unlikely turn into an issue again anytime
soon. Instead, the Democrats’ victory in both houses of Congress has substantially increased the odds of more large-scale fiscal relief in
the near term. These should keep inflation expectations high, real yields depressed and weaken the dollar into 2021.
Short term: While vaccine availability has substantially improved the prospects for an accelerated recovery, a faster spreading virus muta-
tion represents an upside risk for the dollar.
Medium term: The dollar’s former real yield advantage over other G10 currencies has virtually vanished and should keep the USD weak.
Long term: Beyond real yields, the global recovery and higher US twin deficits should constitute a drag to the Greenback. We are con-
vinced that the longer-term downward trend should stay intact at least for the coming 1-2 years.
Forecast BJSS 11-Jan 1Q21 2Q21 3Q21 4Q21 Performance (%) 1w 1m 3m 6m 12m ytd
EURUSD 1.22 1.25 1.28 1.29 1.30 EURUSD -0.7 0.4 2.9 7.7 9.4 -0.4
USDCHF 0.89 0.87 0.84 0.84 0.83 USDCHF 1.0 0.0 -2.3 -5.4 -8.5 0.6
GBPUSD 1.35 1.34 1.38 1.39 1.40 GBPUSD -0.6 2.1 3.5 6.9 3.3 -1.3
USD NEER 100.0 98.9 97.4 96.6 95.9 USD NEER 0.2 -0.7 -3.5 -6.8 -3.3 0.0
Source: Bloomberg, Bank J. Safra Sarasin Source: Bloomberg, Bank J. Safra Sarasin
FX development
Key crosses Nominal and real effective exchange rates
1.80 140
1.60 130
1.40 120
1.20 110
1.00 100
0.80 90
0.60 80
2010 2012 2014 2016 2018 2020 2010 2012 2014 2016 2018 2020
EURUSD USDCHF GBPUSD USD NEER USD REER
Source: Bloomberg, Bank J. Safra Sarasin Source: Bloomberg, Bank J. Safra Sarasin
Cyclical position of the United States
GDP growth & outlook Inflation & monetary policy
70 10 4.0
65
5
60 3.0
0
55
50 -5 2.0
45
-10
40 1.0
-15
35
30 -20 0.0
2010 2012 2014 2016 2018 2020 2010 2012 2014 2016 2018 2020
Markit manufacturing PMI, lhs Industrial production, % yoy, rhs
Key central bank policy rate, % Core CPI, % yoy
Real GDP, % yoy, rhs
Source: Macrobond, Bank J. Safra Sarasin Source: Macrobond, Bank J. Safra Sarasin
10 | US dollar | USDUS dollar | USD
January 12, 2021
Short term factors & sentiment
Relative strength index 3- and 12-month risk reversals
90 0.0
80
-0.5
70
60
-1.0
50
40 -1.5
30
-2.0
20
10
-2.5
0
Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 -3.0
Jan-19 Jul-19 Jan-20 Jul-20 Jan-21
USDCHF RSI 14d RSI > 70: USD overbought
RSI < 30: USD oversold USDCHF 25D3M RR, lhs USDCHF 25D1Y RR, lhs
Source: Bloomberg, Bank J. Safra Sarasin Source: Bloomberg, Bank J. Safra Sarasin
The relative strength index (RSI) indicates whether a currency is overbought or oversold The price of a risk reversal (RR) indicates whether the market is bullish or bearish on a
and is calculated according to the following formula: currency pair and is calculated according to the following formula:
RSI = avg_up / (avg_up + avg_down), where RR_25 = Vol_Call,25 – Vol_Put,25, where
avg_up denotes the average return on days with a positive day-return and Vol_Call,25 denotes the implied volatility of a call option with a delta of 25% and
avg_down denotes the average return on days with a negative day-return Vol_Put,25 denotes the implied volatility of a put option with a delta of -25%
RSIs below 30/above 70 indicate oversold/overbought situations. Positive values indicate that the market expects a higher future spot rate and vice versa.
Medium term factors
Real rates Fed vs ECB balance sheet growth
300 135 45 1.60
250 130 35 1.50
25
200 125 1.40
15
150 120 1.30
5
100 115 1.20
-5
50 110 -15 1.10
0 105 -25 1.00
2015 2016 2017 2018 2019 2020 2021 2010 2012 2014 2016 2018 2020
USD 10y real yield advantage over EUR, GBP and JPY, TW, bps, lhs Balance sheet growth differential, Fed vs ECB, QoQ in %, lhs
USD NEER broad index, rhs EURUSD spot, rhs
Source: Macrobond, Bank J. Safra Sarasin Source: Macrobond, Bank J. Safra Sarasin
Long term factors
Imbalances: United States Valuation: Purchasing power parity
External imbalances 2017 2018 2019 2020 1.60
Current account balance, % GDP -1.9 -2.2 -2.2 n/a 1.50
Net international position, % GDP -39.0 -46.9 -51.6 n/a 1.40
1.30
1.20
Internal imbalances 2017 2018 2019 2020
1.10
Real house prices, % yoy 4.0 2.0 0.5 n/a
1.00
Private sector debt, % GDP 151.2 150.1 150.2 n/a
0.90
Government debt, % GDP 105.7 106.9 108.7 131.2 0.80
0.70
0.60
2006 2008 2010 2012 2014 2016 2018 2020
USDCHF spot USDCHF PPP-implied –/+10%
Source: Bloomberg, IMF, Refinitiv, Bank J. Safra Sarasin Source: Macrobond, Bank J. Safra Sarasin
11 | US dollar | USDPound sterling | GBP
January 12, 2021
Key view: Virus-hit UK economy and narrow scope of EU-UK trade deal continue to be a drag on GBP
The weaker integration into the EU’s internal market mutes the prospects for UK growth. Moreover, the Covid-19 crisis has hit the UK
more than most other European countries, which constitutes another severe drag to the UK economy. Both developments represent sig-
nificant headwinds for the pound sterling.
Short term: We expect some reversal of the excessively positive sentiment in the weeks prior to the conclusion of the UK-EU deal. Some
retracement versus the euro is likely as markets re-assess the scope of the deal and the new post-Brexit reality.
Medium term: Worsening growth prospects likely induce the BoE to introduce negative rates in 1Q21, which should push real yields even
further into negative territory and constitute a drag on GBP.
Long term: While the global recovery should rather play out as a GBP positive versus the USD, the weak market integration of the UK
should keep the GBP weak against the euro.
Forecast BJSS 11-Jan 1Q21 2Q21 3Q21 4Q21 Performance (%) 1w 1m 3m 6m 12m ytd
EURGBP 0.90 0.93 0.93 0.93 0.93 EURGBP -0.1 -1.6 -0.6 0.7 5.9 0.9
GBPCHF 1.20 1.16 1.16 1.16 1.16 GBPCHF 0.4 2.1 1.2 1.1 -5.5 -0.7
GBPUSD 1.35 1.34 1.38 1.39 1.40 GBPUSD -0.6 2.1 3.5 6.9 3.3 -1.3
GBP NEER 100.0 97.6 98.1 98.2 98.3 GBP NEER 0.2 1.9 1.2 1.0 -1.8 -0.4
Source: Bloomberg, Bank J. Safra Sarasin Source: Bloomberg, Bank J. Safra Sarasin
FX development
Key crosses Nominal and real effective exchange rates
1.80 120
1.60
110
1.40
1.20 100
1.00
90
0.80
0.60 80
2010 2012 2014 2016 2018 2020 2010 2012 2014 2016 2018 2020
EURGBP GBPCHF GBPUSD GBP NEER GBP REER
Source: Bloomberg, Bank J. Safra Sarasin Source: Bloomberg, Bank J. Safra Sarasin
Cyclical position of the United Kingdom
GDP growth & outlook Inflation & monetary policy
70 10 4.0
65 5
60 0 3.0
55 -5
50 -10 2.0
45 -15
40 -20 1.0
35 -25
30 -30 0.0
2010 2012 2014 2016 2018 2020 2010 2012 2014 2016 2018 2020
Markit manufacturing PMI, lhs Industrial production, % yoy, rhs
Key central bank policy rate, % Core CPI, % yoy
Real GDP, % yoy, rhs
Source: Macrobond, Bank J. Safra Sarasin Source: Macrobond, Bank J. Safra Sarasin
12 | Pound sterling | GBPPound sterling | GBP
January 12, 2021
Short term factors & sentiment
Relative strength index 3- and 12-month risk reversals
100 1.0
80 0.0
60
-1.0
40
-2.0
20
-3.0
0
Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 -4.0
GBPUSD RSI 14d RSI > 70: GBP overbought Jan-19 Jul-19 Jan-20 Jul-20 Jan-21
RSI < 30: GBP oversold GBPUSD 25D3M RR, lhs GBPUSD 25D1Y RR, lhs
Source: Bloomberg, Bank J. Safra Sarasin Source: Bloomberg, Bank J. Safra Sarasin
The relative strength index (RSI) indicates whether a currency is overbought or oversold The price of a risk reversal (RR) indicates whether the market is bullish or bearish on a
and is calculated according to the following formula: currency pair and is calculated according to the following formula:
RSI = avg_up / (avg_up + avg_down), where RR_25 = Vol_Call,25 – Vol_Put,25, where
avg_up denotes the average return on days with a positive day-return and Vol_Call,25 denotes the implied volatility of a call option with a delta of 25% and
avg_down denotes the average return on days with a negative day-return Vol_Put,25 denotes the implied volatility of a put option with a delta of -25%
RSIs below 30/above 70 indicate oversold/overbought situations. Positive values indicate that the market expects a higher future spot rate and vice versa.
Medium term factors
Real rates Economic sentiment
1.50 1.80 200 1.8
1.00 1.70
1.6
0.50 1.60 100
0.00 1.50 1.4
-0.50 1.40 0
-1.00 1.30 1.2
-1.50 1.20 -100
1.0
-2.00 1.10
-2.50 1.00 -200 0.8
2011 2013 2015 2017 2019 2021 2010 2012 2014 2016 2018 2020
GBP-USD 10y real yield differential, lhs GBPUSD spot, rhs BB Brexit Barometer/Bliss Index, lhs GBP-USD spot, rhs
Source: Macrobond, Bank J. Safra Sarasin Source: Bloomberg, Bank J. Safra Sarasin
Long term factors
Imbalances: United Kingdom Valuation: Purchasing power parity
External imbalances 2017 2018 2019 2020 2.20
Current account balance, % GDP -3.8 -3.7 -4.3 n/a
2.00
Net international position, % GDP -14.1 -15.1 -26.2 n/a
1.80
Internal imbalances 2017 2018 2019 2020
1.60
Real house prices, % yoy -0.4 -1.6 0.0 6.8
Private sector debt, % GDP 162.5 161.1 154.7 n/a 1.40
Government debt, % GDP 86.2 85.7 85.4 108.0
1.20
1.00
2006 2008 2010 2012 2014 2016 2018 2020
GBPUSD spot GBPUSD PPP-implied –/+10%
Source: Bloomberg, IMF, Refinitiv, Bank J. Safra Sarasin Source: Macrobond, Bank J. Safra Sarasin
13 | Pound sterling | GBPJapanese yen | JPY
January 12, 2021
Key view: Global recovery and high integration with Chinese economy continue to yield JPY tailwinds
Year-to date, the yen has benefited from attractive real yields and volatile markets. Moreover, Japan has been among the most crisis-
resilient developed economies. The absence of national lock-downs should warrant a faster recovery to pre-crisis GDP levels than other
G10 economies.
Short term: The circulation of a new virus mutation has increased near-term JPY upside with the possibility of temporary overshooting.
Medium term: Attractive Japanese real yields and weakening portfolio outflows into foreign equities should lend support to the yen. Be-
yond low infection rates, Japan should benefit from its close integration with the Chinese economy
Long term: While Japan should benefit from the further recovery of global economic activity, JPY upside should be partly offset by waning
safe-haven flows into the currency.
Forecast BJSS 11-Jan 1Q21 2Q21 3Q21 4Q21 Performance (%) 1w 1m 3m 6m 12m ytd
USDJPY 104 102 102 101 100 USDJPY 1.0 0.1 -1.4 -2.6 -4.9 0.8
CHFJPY 117 118 120 120 120 CHFJPY 0.0 0.1 0.9 3.0 3.9 0.3
EURJPY 127 128 130 130 130 EURJPY 0.3 0.5 1.4 4.8 4.1 0.4
JPY NEER 100.0 100.0 99.6 99.9 100.2 JPY NEER -0.5 -0.7 -1.1 -3.0 1.1 -0.9
Source: Bloomberg, Bank J. Safra Sarasin Source: Bloomberg, Bank J. Safra Sarasin
FX development
Key crosses Nominal and real effective exchange rates
160 120
110
140
100
120
90
100
80
80
70
60 60
2010 2012 2014 2016 2018 2020 2010 2012 2014 2016 2018 2020
USDJPY CHFJPY EURJPY JPY NEER JPY REER
Source: Bloomberg, Bank J. Safra Sarasin Source: Bloomberg, Bank J. Safra Sarasin
Cyclical position of Japan
GDP growth & outlook Inflation & monetary policy
70 40 3.0
65 30 2.5
2.0
60 20
1.5
55 10 1.0
50 0 0.5
45 -10 0.0
-0.5
40 -20
-1.0
35 -30 -1.5
30 -40 -2.0
2010 2012 2014 2016 2018 2020 2010 2012 2014 2016 2018 2020
Markit manufacturing PMI, lhs Industrial production, % yoy, rhs
Key central bank policy rate, % Core CPI, % yoy
Real GDP, % yoy, rhs
Source: Macrobond, Bank J. Safra Sarasin Source: Macrobond, Bank J. Safra Sarasin
14 | Japanese yen | JPYJapanese yen | JPY
January 12, 2021
Short term factors & sentiment
Relative strength index 3- and 12-month risk reversals
80 0.0
70 -1.0
60 -2.0
-3.0
50
-4.0
40
-5.0
30
-6.0
20 -7.0
10 -8.0
0 -9.0
Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 -10.0
Jan-19 Jul-19 Jan-20 Jul-20 Jan-21
USDJPY RSI 14d RSI > 70: JPY oversold
RSI < 30: JPY overbought USDJPY 25D3M RR, lhs USDJPY 25D1Y RR, lhs
Source: Bloomberg, Bank J. Safra Sarasin Source: Bloomberg, Bank J. Safra Sarasin
The relative strength index (RSI) indicates whether a currency is overbought or oversold The price of a risk reversal (RR) indicates whether the market is bullish or bearish on a
and is calculated according to the following formula: currency pair and is calculated according to the following formula:
RSI = avg_up / (avg_up + avg_down), where RR_25 = Vol_Call,25 – Vol_Put,25, where
avg_up denotes the average return on days with a positive day-return and Vol_Call,25 denotes the implied volatility of a call option with a delta of 25% and
avg_down denotes the average return on days with a negative day-return Vol_Put,25 denotes the implied volatility of a put option with a delta of -25%
RSIs below 30/above 70 indicate oversold/overbought situations. Positive values indicate that the market expects a higher future spot rate and vice versa.
Medium term factors
Real rates BoJ vs Fed balance sheet growth
3.00 140 10 70
130
2.00 80
120 5
1.00 90
110
0 100
0.00 100
90 110
-1.00 -5
80 120
-2.00
70
-10 130
-3.00 60 2010 2012 2014 2016 2018 2020
2011 2013 2015 2017 2019 2021
Balance sheet growth differential, Fed vs BoJ, QoQ in %, lhs
USD-JPY 10y real yield differential, lhs USDJPY spot, rhs USDJPY spot, reversed, rhs
Source: Macrobond, Bank J. Safra Sarasin Source: Macrobond, Bank J. Safra Sarasin
Long term factors
Imbalances: Japan Valuation: Purchasing power parity
External imbalances 2017 2018 2019 2020 140
Current account balance, % GDP 4.2 3.6 3.6 n/a 130
Net international position, % GDP 59.4 61.1 65.2 n/a
120
Internal imbalances 2017 2018 2019 2020 110
Real house prices, % yoy 1.2 1.7 -0.3 n/a 100
Private sector debt, % GDP 156.9 160.9 164.0 n/a
90
Government debt, % GDP 234.5 236.6 238.0 266.2
80
70
2006 2008 2010 2012 2014 2016 2018 2020
USDJPY spot USDJPY PPP-implied –/+10%
Source: Bloomberg, IMF, Refinitiv, Bank J. Safra Sarasin Source: Macrobond, Bank J. Safra Sarasin
15 | Japanese yen | JPYGold | XAU
January 12, 2021
Key view: Likely consolidation throughout 1H21, but prospect of higher inflation should ultimately push gold higher
Upon the outbreak of the Covid-19 crisis, gold has benefitted from substantial safe haven inflows. Furthermore, large-scale fiscal relief
packages have increased inflation expectations, which have pushed real yields down and catalysed a rally in 3Q20. Throughout 2021, we
expect gold to be supported at elevated levels, while some retracement is likely throughout 1H21. Waning safe-haven demand should be
largely offset by rebounding private consumption, which has suffered during the crisis year.
Short term: Net long speculative positioning has become less stretched. ETF demand is poised to stay weak in the near term, which
should constitute a headwind to the precious metal.
Medium term: The global recovery should move nominal yields higher throughout 2021, which should also impact real yields and materi-
alize in a consolidation of the gold price, while a recovery in consumer demand should partly offset these headwinds
Long term: In a three to five years horizon, inflation overshooting along with a weaker USD should push gold to new highs. Central bank
buying and recovered consumer and ETF demand likely yield additional support.
Gold, USD per troy ounce 11-Jan 1Q21 2Q21 3Q21 4Q21 Performance (%) 1w 1m 3m 6m 12m ytd
Forecast BJSS 1’850 1’830 1’800 1’820 1’850 Gold, USD per troy ounce -4.7 0.6 -4.1 2.9 18.5 -2.5
Bloomberg Consensus 1’850 1’851 1’852 1’854 1’856 Gold, CHF per troy ounce -3.8 0.6 -6.3 -2.7 8.4 -2.0
Source: Bloomberg, Bank J. Safra Sarasin Source: Bloomberg, Bank J. Safra Sarasin
Price development
Nominal and real price Gold price vs US 10y TIPS yields
2’500 2’200 -150
2’000 2’000 -100
1’800 -50
1’500
1’600 0
1’000
1’400 50
500 1’200 100
0 1’000 150
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21
Gold, USD per ounce Gold, USD per ounce, 2020 dollars Gold, USD per troy ounce 10y TIPS yields, inverted bps, rhs
Source: Bloomberg, Bank J. Safra Sarasin Source: Bloomberg, Bank J. Safra Sarasin
Short term factors & sentiment
CFTC positioning ETF demand
0.50 2’100 4’500 2’200
0.40 1’900 2’000
4’000
0.30 1’700 1’800
3’500
0.20 1’500 1’600
0.10 1’300 3’000
1’400
0.00 1’100 2’500
1’200
-0.10 900
Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 2’000 1’000
2018 2019 2020 2021
Gold, CFTC net speculative positioning, m contracts, lhs
Gold, USD per ounce, rhs Global ETF holdings, tonnes Gold, USD per ounce
Source: Macrobond, Bank J. Safra Sarasin Source: World Gold Council, Bank J. Safra Sarasin
16 | Gold | XAUGold | XAU
January 12, 2021
Short term factors & sentiment
Relative strength index 3- and 12-month risk reversals
100 6.0
80 5.0
4.0
60
3.0
40
2.0
20
1.0
0
Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 0.0
Jan-19 Jul-19 Jan-20 Jul-20 Jan-21
Gold, USD per ounce, RSI 14d RSI > 70: Gold overbought
RSI < 30: Gold oversold XAUUSD 25D3M RR, lhs XAUUSD 25D1Y RR, lhs
Source: Bloomberg, Bank J. Safra Sarasin Source: Bloomberg, Bank J. Safra Sarasin
The Relative Strength Index (RSI) indicates whether a currency is overbought or oversold The price of a risk reversal (RR) indicates whether the market is bullish or bearish on a
and is calculated according to the following formula: currency pair and is calculated according to the following formula:
RSI = avg_up / (avg_up + avg_down), where RR_25 = Vol_Call,25 – Vol_Put,25, where
avg_up denotes the average return on days with a positive day-return and Vol_Call,25 denotes the implied volatility of a call option with a delta of 25% and
avg_down denotes the average return on days with a negative day-return Vol_Put,25 denotes the implied volatility of a put option with a delta of -25%
RSIs below 30/above 70 indicate oversold/overbought situations. Positive values indicate that the market expects a higher future spot rate and vice versa.
Medium term factors
Fair-value alignment Private consumer demand
600 attributable to real yields, lhs 2’100 Gold, world-wide private consumption (jewellery, bars, coins), metric tonnes
attributable to safe-haven flows, rhs
1’500
Gold price, USD per ounce, model fit, rhs
400 Gold price, USD per ounce, rhs 1’900
200 1’700 1’000
0 1’500
500
-200 1’300
0
-400 1’100 2010 2012 2014 2016 2018 2020
Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Americas Europe ex CIS Middle East Greater China India Others
Source: Macrobond, Bank J. Safra Sarasin Source: World Gold Council, Bank J. Safra Sarasin
Long term factors
Largest central bank purchases in 2020 Worldwide central bank purchases, 2000–2020
Turkey 134 400 2’200
India 38 300
1’800
Russia 200
27
100 1’400
UAE 24
Qatar 0 1’000
14
Argentina -100
7
600
Cambodia -200
5
Others -300 200
-64
2002 2005 2008 2011 2014 2017 2020
-100 -50 0 50 100 150
Worldwide central bank gold purchases per quarter, 1y ma, tonnes, lhs
2020 central bank gold buying, in tonnes Gold, USD per ounce, rhs
Source: World Gold Council, Bank J. Safra Sarasin Source: World Gold Council, Bank J. Safra Sarasin
17 | Gold | XAUDisclaimer January 12, 2021 Disclaimer/Important Information This document has been prepared by Bank J. Safra Sarasin Ltd (“Bank”) for information purposes only. It is not the result of financial research conducted. Therefore, the “Directives on the Independence of Financial Research” of the Swiss Bankers Association do not apply to this doc- ument. This document is based on publicly available information and data (“the Information”) believed to be correct, accurate and complete. The Bank has not verified and is unable to guarantee the accuracy and completeness of the Information contained herein. Possible errors or in- completeness of the Information do not constitute legal grounds (contractual or tacit) for liability, either with regard to direct, indirect or con- sequential damages. In particular, neither the Bank nor its shareholders and employees shall be liable for the views contained in this docu- ment. 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