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FX NavigatorH1 2021Key insights and forecasts forthe months ahead from ourMarket Risk Solutions Team
ContentsPage 03Page 08Events of a trulyunprecedentedyear willreshapeeconomiesEuro (EUR) —trending upwardsPage 14The macro lensPage 05Numbers youneed to knowPage 10British Poundsterling (GBP) – atale of extremesPage 12Page 06US dollar (USD): Willthe dollar be greeneron the other side?Israeli new shekel(ILS) — bouncingback, again and againPage 16FX innovation:e-commerce andcurrenciesPage 17Currency returnsagainst USDSILICON VALLEY BANK FX NAVIGATOR H1 20212
Events of a trulyunprecedentedyear will reshapeeconomiesAt the beginning of 2020, the worldcontemplated how the outcome of tradenegotiations between the UK andEuropean Union would shape marketson this side of the Atlantic, while anupcoming US presidential election wasset to do the same on the other. At thisearly stage there was no line of sight asto the eventual impact of COVID-19.COVID-19 drove unprecedented economicand monetary action by governments andcentral banks across the world, disruptingglobal markets as interest rates were rapidlycut, and capital was swiftly injected intoeconomies at an extraordinary pace.Following an initial flight to safety in March,the US dollar peaked before reversing tolevels last seen in 2018. The year aheadwill see central banks and governmentsreview their measures and begin toconsider what recuperation might look like.2021 will offer certainty in some areas asthe UK and EU have agreed a trade deal, andthe US transition to a new administration.Whilst the EU and the European Central Bank(ECB) will begin to navigate a differentiatedrecovery across member states.As vaccine approvals bring the world closerto drawing a line under the pandemic,governments will start to tackle their bloatedbalance sheets and look to set themselves onthe path of economic recovery.SILICON VALLEY BANK FX NAVIGATOR H1 20213
As vaccine approvals bring the world closerto drawing a line under the pandemic,governments will start to tackle their bloatedbalance sheets and look to set themselves on thepath of economic recovery. Ballooning deficitsand economies wanting for stimulus will be setagainst depleted treasury coffers.With the pandemic entering its second year, it isclear that for many economies the road torecovery will be long. Without doubt thepandemic will reshape economies for manyyears to come, but the question is how?83.4mCOVID-19 casesworldwide**as at year endBalancing the books – Current account deficitsPERCENT OF GDPUKUSEuro zone40-4-8-1201/ 03 /2000Mar 200001/ 04/2004Mar 200501/ 05 /200801/ 06/201201/ 07/ 2016Mar 2010Mar 2015Jun 2020Source: Bloomberg Financial, January 2021COVID-19 casesNUMBER OF CASESUSGBEU2021 will offer certainty insome areas as the UK andEU have agreed a tradedeal, and the US transitionto a new administration.European governments,the EU and the EuropeanCentral Bank (ECB) willbegin to navigate adifferentiated recoveryacross member states.Your Market RiskSolutions teamIsrael20,000,00016,000,000Nish ParekhKieran Cleere12,000,000Sam CooperBen Pullicino8,000,000Olivia YoungAmy Cooper4,000,000001/ 01/2020Jan 2020Adam Dowsett01/ 04/2020Aor 202001/ 07/ 2020Jul 202001/ 10/2020Oct 2020Dec 2020Source: Bloomberg Financial, January 2021SILICON VALLEY BANK FX NAVIGATOR H1 20214
Numbersyou needto know1.141217.5%1653Lowest level inGBPUSD since 1985Range in USDILSDays from BrexitReferendum to theUK leaving the EU1568-0.50%point range inS&P 500ECB deposit rate,lowest on record 29,292 -40.32Bitcoin's highest price,reached on 31 DecemberNegative price reached for Brentcrude oil, WTI, price per barrelSILICON VALLEY BANK FX NAVIGATOR H1 20215
US dollar (USD):Will the dollarbe greener onthe other side?The dollar had a volatile year as theCOVID-19 pandemic drove both politicaland economic rhetoric throughout. Theappetite for perceived safe-haven assetsplayed a large part in determining thedirection of the greenback among itsG10 peers as sentiment fluctuated.Over the course of 2020, a state-by-stateapproach to the pandemic has appeared tostruggle in arresting the coronavirus surge. Bythe end of the year, the US reached astaggering 19.9 million recorded cases andover 345,000 deaths, contributing nearly20% of deaths globally. Rising cases in thesecond half of the year continued to damagean already struggling economy, with Q3 yearon year growth down 2.8%.The introduction of the vaccine in Decemberwas welcomed by markets, with global stockssurging on the news. The S&P rallied 16% andthe Nasdaq subsequently 20% during Q4,reaching record highs, but the dollar indexdeclined further as a rise in global optimism1568point rangein S&P 500weighed on the appeal of the greenback.Emergency relief billThe Federal Reserve (Fed) provided supportfor the US, and the global economythroughout 2020 by way of low interest rates,unparalleled levels of quantitative easing(QE) and central bank swap funding lines. The0-0.25%The change of inflationtargets to a long termambition of 2% was animplied acknowledgmentthat rates are likely toremain low for aprolonged period.Fed funds ratesince MarchFed funds rate has remained at 0 – 0.25%since March and the change of inflationSILICON VALLEY BANK FX NAVIGATOR H1 20216
targets to a long term ambition of 2% was animplied acknowledgement that rates are likelyto remain low for a prolonged period.Federal assistance of more than 3 trillionUSD over the year was only able to stem thetide for so long as lockdown restrictionsforced businesses to close, leaving over19 million US workers claiming joblessbenefits at year end. Additional support wassought in the shape of a fiscal stimuluspackage, however a divided house anduntimely election forced stalemate and delaybetween the Republican Senate andDemocratic Congress. At the 11th hour, withthe prospect of a government lockdownimminent, a compromise was struck for a 900bn emergency relief bill offering furthersupport to the economy.Presidential power3 trillionUSD in FedassistanceThe outcome has been broadly perceived bythe market as dovish for the dollar and equitieswith the change of guard potentially reshapingthe US corporate tax landscape and unwindingregulation implemented by President Trump.Biden’s ability to pass significant legislationwill be informed by which party holds theSenate. Foreign Policy under Biden is expectedto return to a more conventional tone with afocus on building foreign alliances. WhilstAt the 11th hour, with the prospect of agovernment lockdown imminent, a compromisewas struck for a 900bn emergency relief billoffering further support to the economy.the rhetoric around China may softenthe direction of travel is unlikely to changesignificantly. Recalibration with Europeanallies will be prioritised to galvanise amutual international outlook. This could seea de-escalation of trade tensions observedunder the previous administration.Federal Reserve balance sheetUS DOLLARS (TRILLIONS)Playing the long 000433,000,00001/ 01/2020Jan 202001/ 04/2020Apr 202001/ 07/ 2020Jul 202001/ 10/2020Oct 2020Dec 2020Source: Bloomberg Financial, January 2021Nonfarm payroll volatilityTHOUSANDSThe presidential election became the forefrontof political discussion in November asDemocratic candidate Joe Biden was eventuallyannounced president-elect following a latesurge to the finish line, reaching 306 electoralcollege votes to Trump’s 232. The Bloombergdollar spot index lost 2.3% in value during theweek of the election as the vote was tallied andremained too close to call.The latter end of 2020 saw the dollar continueits downward trend, losing 5% in the finalquarter against a basket of currencies andreaching its lowest level in over two years asrisk appetite returned and positions unwound.While the road ahead is likely to remainturbulent, the greenback looks set to face theconsequences of a market that has beenstructurally long dollars. With the Fed guidinginterest rates will remain close to zero forthe next three years, a once attractive yieldis likely to continue to see investors seekgreater returns elsewhere.5%50000reduction infinal quarter-5000-10000-15000-20000-2500001/ 01/2020Jan 202001/ 04/2020Apr 202001/ 07/ 2020Jul 202001/ 10/2020Oct 2020Dec 2020Source: Bloomberg Financial, January 2021SILICON VALLEY BANK FX NAVIGATOR H1 20217
Euro (EUR) —trending upwardsThe shared currency was no exception to the volatilityobserved across the board in 2020, as the euro areafound itself one of the first to navigate the COVID-19outbreak. As the first peak of the pandemic fueled aselloff, the euro slipped to its lowest level against thedollar since early 2017, trading to 1.0636.The euro recovered throughout the year, tradingat 1.2215 against the dollar and 0.8937 againstthe pound, closing the year with favourablemomentum behind the shared currency.COVID-19 has seen Eurozone GDP declineacross 4.3% YoY to the third quarter with afurther slowdown anticipated in Q4. Steppinginto the new year having recently completednegotiations for a 1.8 trillion budget, includinga landmark recovery fund, the EU will begin todisburse much needed support to all membersbut particularly hard hit southern states.1.0636Lowest levelin EURUSDsince 2017EURUSDUSD PER EUROThe impact prompted a unified response fromthe bloc, with respective leaders agreeing toissue collective debt for this first time. Brexitnegotiations continued in the background as theEU and the UK continued robust discussions.1.251.21.151.11.0501/ 01/2020Jan 202001/ 04/2020Apr 202001/ 07/ 2020Jul 202001/ 10/2020Oct 2020Dec 2020Source: Bloomberg Financial, January 2021Stepping into the new year having recentlycompleted negotiations for a 1.8 trillionbudget, the EU will begin to disburse muchneeded support to all members.SILICON VALLEY BANK FX NAVIGATOR H1 20218
Europe’s leaders make their markEuropean Central Bank President ChristineLagarde assumed office on 1 November 2019and a mere five months later faced the fiercestcrisis the bloc had seen since the GlobalFinancial Crisis. However, her previousexperience as head of the InternationalMonetary Fund allowed her to hit the groundrunning as she took the helm under difficultcircumstances. The central bank acted quicklyto calm markets and provide support to thebloc’s financial institutions. The ECB put inplace a 750 billion emergency bond-buyingprogramme to inject liquidity into the system,to ensure banks and other key marketstakeholders were sufficiently capitalised toweather the crisis.German Chancellor Angela Merkel, who hasheld office since 2005, is due to step down in2021 having concluded Germany’s EU Councilpresidency completing Brexit negotiations,establishing the first European debtprogramme and agreeing an investmentdeal with China. Her departure will leave asignificant void at the heart of Europeanpolitics in the year ahead. 750bemergencybond-buyingprogrammeThe European Central Bank acted quickly tocalm markets and provide support to the bloc’sfinancial institutions with a 750 billionemergency bond-buying programme to injectliquidity into the system.The next chapterWith Merkel stepping down this year her partywill look to nominate a replacement to head theCSU/CDU, who is likely to succeed theChancellor. France’s President Macron is due tocontest a tough election in 2022 and so domesticconsiderations will be a growing priority. As aresult, the political agenda and narrative ofthese EU stalwarts over the medium termremains to be seen. In the shorter-term, Macronis likely to seek to make his mark on theEuropean agenda in the year ahead. ThePresident of the European Commission, Ursulavon der Leyen, having played a leading role innegotiating the UK’s departure from the bloc,will offer some continuity through transitionsand distractions in the EU’s leading economies.Europe will, like many, need a steady hand atthe helm following the pandemic.EURO BILLIONSECB balance sheet total assets7,5006,5005,5004,50003/01/2020Jan 202003/04/ 2020Apr 202003/07/2020Jul 202003/10/2020Oct 2020New uncertainties await as collective debt,underwritten by all EU members, is to bedeployed, launching a significant stimuluspackage to help kick start the economy followingthe pandemic. Whilst consensus was ultimatelyreached on the pan-European rescue package,any further support will see renewed focus onthe ‘Frugal Four’, comprised of Austria,Denmark, Sweden and the Netherlands, as thecountries are expected to once again show fierceresistance to any further stimulus measures.Christine Lagarde has welcomed the news withthe ECB, having repeatedly insisted that fiscalsupport was needed alongside the centralbank’s ‘dovish’ monetary policy.Dec 2020Source: Bloomberg Financial, January 2021SILICON VALLEY BANK FX NAVIGATOR H1 20219
British Poundsterling (GBP)– a tale ofextremesAs anticipated, Brexit negotiations were among the mainfocus points of 2020, however the unanticipated pandemicfilled the spotlight. With the outbreak going global inMarch, sterling plummeted to levels not seen since 1985,becoming one of the biggest victims of dollar demand, asinvestors flocked to the safe-haven currency. Althoughvolatility was expected, the range through the peaks andtroughs could not be predicted – hitting lows of 1.1412 inMarch and 30-month highs, above 1.3600.The UK government has been continuallyunder scrutiny for its handling of the pandemic.Britain entered nationwide lockdown later thanits European peers and quickly overtook Spainand Italy on the number of cases and deaths.More than 2.4 million confirmed cases ofcoronavirus and 72,000 deaths by the end ofthe year left the UK only slightly behind Italy,the country in Europe with most deathsattributed to the pandemic.A brief sigh of relief came with the UK being thefirst western country to approve a COVID-19vaccine, subsequently starting a large-scalevaccination roll-out. The FTSE 100 recordedits best month since 1989, rising 12.4%, inNovember after the uplifting news. As we enterthe new year, there does not seem to be anyrespite from the virus with new variantsincreasing the rate of transmission andadding further complications to the crisis.GBPUSDUSD PER POUNDVaccines herald hope but hurdlesyet to be crossedThe Bank of England reacted quicklyto the economic downturn in March,dropping interest rates from 0.75% to0.25% initially, and then to an all-timelow of 0.10% a week later, as well asramping up their quantitative easingprogramme in a bid to help prevent thecountry entering a recession. The Bankof England has stressed it would not cutrates lower, however in November itinjected a further 150 billion as thesecond wave of the virus began todiminish the economy once again.1.41.31.21.101/ 01/2020Jan 202001/ 04/2020Apr 202001/ 07/ 2020Jul 202001/ 10/2020Oct 2020Dec 2020Source: Bloomberg Financial, January 2021SILICON VALLEY BANK FX NAVIGATOR H1 202110
New year, new rulesFour and a half years after the Brexit referendumvote and following nine months of intensenegotiations, the UK and the EU finally reachedan agreement on an economic partnership thatwill govern bilateral trade worth more than 650 billion. The main sticking points of fishingrights, state aid, and a level playing fieldconcept were regular features in the news.Sterling became increasingly correlated withheadlines, often moving 1-2% on news ofprogress vs no progress.The deal, arriving as an early Christmas presentfor markets on 24 December, covers aspects oftrade in sectors including pharmaceutical,professional services, chemicals and autos, andoutlines new terms for trading goods across theborder. In relation to the level playing fieldconcept, the UK is now free to set out its ownstandards in certain areas such as labour andenvironmental law. However, UK businesses willneed to meet both sets of standards andregulations and will risk losing access if theydeviate too far from EU rules. UK nationals willalso have restrictions on their ability to work,study, start a business or live in the EU.Although services make up close to 80% of UKGDP and 2/5s of the UK’s trade with Europe, theagreement will leave UK services unprotectedgoing forward.With the USD broadly expected to weakenunder the new president, and a Brexit deal atthe finish line, market participants expect thepound to gain some ground against thegreenback as the year progresses.A bounce back for Britain?With the UK becoming the first westernnation to approve a vaccine with the COVID-19vaccination programme kicking off in December2020, many expect the country to be back onits economic feet in the latter part of 2021.With the USD broadly expected to weakenunder the new president, and a Brexit deal atthe finish line, market participants expect thepound to gain some ground against thegreenback as the year progresses.Sterling became increasingly correlatedwith headlines, often moving 1-2% on newsof progress vs no progress of a trade deal.With the certainty that the UK will not breakfrom the EU without a deal, much of thedownside sterling risk was alleviated, withpotential future cooperation reassuring manyinvestors. Gains will likely be limited, however,as trade may be sluggish to begin with whilethousands of firms adapt to the new rules andadditional bureaucracy. Coronavirus andBritain’s relative performance in managing itwill remain a key driver for the currencyentering the new year.Regional GDP growthGDPUKUSEZILS40200-20-4001/ 03 /2001Mar 200101/ 02/ 2005Jun 200501/ 01/200901/ 12/ 201201/ 11/2016Jun 2010Sept 2015Source: Bloomberg Financial, January 2021Sept 20200.10%All-time lowinterest rateSILICON VALLEY BANK FX NAVIGATOR H1 202111
Israeli newshekel (ILS) —bouncing back,again and againUSDILSSHEKEL PER USDIn a period of just twelve months, theshekel has recorded its weakest levelagainst the dollar in over three years,before recovering to a 20 year high asunprecedented demand for both USDand ILS rotated throughout the year.43.83.6After trending lower for 15 months, USDILSexperienced a sharp, short term reversal, withthe pair moving from 3.42 in February, ridingmomentum up to 3.84 at its March peak as theeffect of the pandemic was reflected in theflight to safety. The shekel was one of the firstdeveloped market currencies to fall victim of apanic-fueled selloff as concerns regarding thelasting impact of COVID-19 to the economyrattled investors. However, thanks to thecountry’s early reaction to the pandemic,introducing strict quarantine and lockdownmeasures, confidence soon returned. Concernsof a second lockdown saw USDILS bounce backbriefly to 3.50 before business as usualreturned and the path remained lower.Following a brief period of trading sideways,the theme of relentless shekel strength, whichthe market has become accustomed to,returned in full force. The move lower occurredin almost linear fashion, with the perceived3.43.201/ 01/2020Jan 202001/ 04/2020Apr 202001/ 07/ 2020Jul 202001/ 10/2020Oct 2020Dec 2020Source: Bloomberg Financial, January 2021Following a brief period oftrading sideways, thetheme of relentless shekelstrength, which the markethas become accustomed to,returned in full force.17.5%Range in USDILStechnical level of support at 3.40 broken andsending the pair into a relative freefall.SILICON VALLEY BANK FX NAVIGATOR H1 202112
Employment snapshotTHOUSANDSDespite political uncertainty, theeffect on the shekel remains muted,perhaps an indication thatconfidence in the economy remains,regardless of who holds office.3940Confidence in the currencyThe Bank of Israel remained active throughoutthe year’s events, accumulating currencyreserves in its effort to pull the reins on arampant shekel, which peaked at 167 billionin November. Despite this, the effectiveness ofits open market operations diminished asshekel demand remained persistent andcompanies continued to repatriate globalprofits back into ILS. The central bank appearsto have ample tools available in the monetarypolicy toolbox
review their measures and begin to consider what recuperation might look like. 2021 will offer certainty in some areas as the UK and EU have agreed a trade deal, and the US transition to a new administration. Whilst the EU and the European Central Bank (ECB) will begin to
