LUV! is all you need——FX response to different growth profiles
FX performance and drivers are likely to vary greatly depending on the post- lockdown path for the global economy We consider four scenarios: “L”, “U”, “V” and “!”
This report highlights the likely winners and losers in FX under each scenario
We are not virologists or epidemiologists. We are FX strategists. Therefore, when crafting an FX strategy, some humility about the likely path of the COVID-19 pandemic and the associated economic path is warranted. Under normal circumstances, our forecasts would lay out the case for our highest conviction projection, pushing back against alternatives and sometimes standing out from the crowd as a result. Our counter-consensus bullishness on the USD for the last two years and our risk case starting 2020 that the USD was more likely to surge this year than weaken are cases in point. But we are no longer in normal circumstances and normal levels of conviction around a single forecast are no longer possible and not especially useful given the huge degree of uncertainty surrounding the economic outlook. The solution is a scenario-based approach. In this report, we examine four economic scenarios, “L”, “U”, “V” and “!”, while their basic elements and FX implications are summarised on the next page. The four sections ahead delve into each of them in turn, first providing a definition of what we believe each scenario actually represents before drawing out the implications for the five segments of the FX market (G10, Asia, CEEMEA, LatAm and gold).