The Australian Dollar continued its rise into the close of the 2020, increasing 11.75% on the year. This was aided by the continued fall of the United States Dollar Index, which is a basket of currencies (predominately 57.6% Euro, 13.6% Japanese Yen, 12% Pound Sterling and other smaller currencies)².

The US Dollar is approaching 4 year lows and could accelerate towards the downside if this low is surpassed, as it is a key technical level. The fundamental backdrop of continued large stimulus, potentially exacerbated with the typical thought of Democrats willingness to spend more than Republicans, may be bearish for the US Dollar going forward into 2021. However, if global economic conditions do not improve and deteriorate, the Dollar is perceived as a safe-haven (as seen in March 2020) and would be sought after to safeguard against global risks.

² Reuters 2021

The United States have formally certified Joe Biden as the next United States president and will officially take up office on the 20^th of January 2020. The Democratic Party will have control over Congress and The Senate as both Republican senators were beaten in the Georgian run-off elections on the 5^th of January. Having both houses will mean they will have the ability to implement the full extent of their agenda with little resistance.

Under a Biden administration, an increase in stimulus would be expected. Stimulus in the form of infrastructure spending, spending associated to green technologies and payments in the form of direct payments to the public are expected. This is likely to be seen as favourable to markets, whilst also potentially pressuring yields to increase due to government deficits increasing further.

The other major global elections that are occurring this year are Hong Kong, Russia and Germany which are set for September 2021.

Various COVID-19 vaccines have been rolled out across the world. The European Union has started the first cycle of the BioNTech-Pfizer vaccine with priorities on high-risk groups as only a limited number of vaccines are available in the early stages. It is expected that mass vaccinations will begin in March/April of 2021, however these timelines have potential to change.

The United States and Canada have also started to administer the BioNTech-Pfizer vaccine as well as approving the vaccine produced by Moderna. Areas of South America, India and Russia have also started to use various vaccines, namely the Sputnik V vaccine. China has five vaccines being used and was the earliest country to begin vaccinating the public starting in November of 2020. Australia is still yet to begin vaccinating the public but is expected to begin as early as February. The use of both the BioNTech-Pfizer and AstraZeneca vaccine will take place in Australia. As the BioNTech-Pfizer vaccine is being manufactured overseas, the greater public is likely to receive the AstraZeneca vaccine due to the ability to create it domestically.

Questions as to whether the vaccines will be effective in curbing Coronavirus are still in question as the virus mutates. Scientists say about 70% of a country’s population needs to be vaccinated for a return to normalcy to take place. As many areas of the world including Europe, the United Kingdom and Unites States begin their third lockdown, the need for a solution lays with the effective roll-out of vaccines. The risk with not having an effective roll-out might have far-reaching impacts which could in turn hurt market confidence.

The 2021 outlook remains similar to 2020 in regards to the level of uncertainty within markets and economies. With mass vaccinations being the main theme from a health perspective, markets have priced in a strong recovery with an assumption of a return to normal functioning economies. If setbacks occur in regard to the efficacy of vaccines or the inability to vaccinate a large enough number of the world’s population to positively reduce the spread of the virus, markets will have to adjust to this reality. However, with the willingness of governments and central banks to inject stimulus into economies, it is hard to imagine a market event as significant as March 2020 to take place again without there being other catalysts at play.

In the event of a return to normalcy, we expect value to outperform growth as beaten down cyclical sectors such as energy and consumer discretionary will again have a more significant role to play.

If vaccine setbacks occur and there are no major improvements in curbing the spread of the virus, growth sectors such as technology, that do not rely on healthy economies, will see inflows as a safety-trade. This is what was seen throughout 2020.

Precious metals had a significant run throughout 2020 as they adjusted to the extreme expansion of government and central bank balance sheets. We would see this trend remain if governments are as willing to continue this trend into 2021. A reopening of economies, increasing government bond yields and risk-on sentiment remain the largest risk for precious metals. If the US Federal Reserve continues its asset purchases, precious metals may continue with their upward trend.

The US Dollar has been in a large downward trajectory over the past year, for the two main reasons that the US has been in both political and economic uncertainty. Given the new Biden administration removing political tensions and the potential of an improving economy we could see a bounce in the US Dollar.

The potential of an infrastructure spending policy adopted in the US by the Biden administration, could also see the demand for Australian iron ore increase. This could be a positive for the Australian economy in reducing our reliance on China.

Investors would have also seen over the course of the last few months the price of cryptocurrencies skyrocketing, particularly Bitcoin (currently priced at AUD $50,816 a coin³). This price movement has mostly been related to institutional money flowing into cryptocurrency, beyond the typical retail investor. Interestingly, China is working on their own digital currency that they would like to roll out to challenge the power the US holds with its own currency⁴. We still believe cryptocurrencies to be a very risky and volatile. Cryptocurrencies are yet to infiltrate normal markets and still have a very long road ahead of them.

In summary we see markets continuing their upward trajectory but do have worries around global recoveries if the vaccine is not rolled out fast enough. If the Biden administration continues its stimulus policy this will continue to be positive for markets.

³ BTC Markets, https://www.btcmarkets.net/ 15/01/2021
⁴ The Economist, https://www.economist.com/finance-and-economics/2020/04/23/china-aims-to-launch-the-worlds-first-official-digital-currency 15/01/2021

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