Remaining mildly bearish, but finding pockets of deeper depreciation

Our previous outlook on the US dollar called for a structural decline in the greenback throughout 2021, largely due to the Fed’s dovish reaction function under the Average Inflation Target (AIT) framework and an expected improvement in global economic conditions due to the development of Covid-19 vaccines. With the introduction of vaccines in the early part of 2021, economic conditions have generally improved globally, or at least show signs of improvement into the middle of the year once critical mass is achieved (see here for vaccination projections). However, the US dollar hasn’t exhibited the broad structural decline that we anticipated back in December’s outlook. This is largely due to the results of the Georgia senate run-off in January, which paved the way for Biden’s $1.9trn fiscal stimulus package in March, and an earlier and more aggressive vaccine rollout in the US relative to most DM countries. Together, both developments have increased the likelihood that the US economy will substantially outperform peers in 2021, reflected in both the increase and steepening of the US yield curve.

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