V for vaccine and vulnerable USD – HSBC

Economists at HSBC now abandon their ‘U-shaped’ view and expect USD weakness to persist into 2021 as this is consistent with market expectations of a ‘V-shaped’ recovery. However, USD weakness is cyclical not structural in nature, and thus is likely to be limited in scale and duration.

Key quotes

“Massive monetary and fiscal easing have allowed markets to retain their ‘V-shaped’ recovery mindset, despite renewed waves of COVID-19 in many countries. Expectations for disbursement of a vaccine through 2021 have allowed risk appetite to shrug off the current wave of renewed containment measures. A selectively risk-positive spin on the implications of the US election outcome has also sustained the reflationary theme for 2021.”

“We have chosen to abandon our ‘U-shaped’ view (which was suggestive of uncertainty over the growth upswing) to embrace the market’s enthusiasm for a ‘V-shaped’ recovery, although we do so modestly. It means further broad weakness in the USD rather than divergent prospects for it. Yet, the decline we envisage for the USD is not without limits in terms of magnitude or duration, as it is cyclical not structural in nature.”