The Democrats’ victories in Georgia’s twin Senate races is the first major surprise of 2021. It will enable the party to control the White House, the House of Representatives and the Senate. The ‘Blue Wave’ will thus allow the incoming Biden administration to enact further fiscal stimulus to support the US economy this year.
We expect the new US government that takes office on Inauguration Day, 20 January, will aim to quickly pass a fresh round of fiscal aid worth USD1 trillion with cheques to households, top-ups for unemployment benefits and support to state and local governments.
In December, Congress approved USD900 billion of emergency aid but we estimate that the funds will largely be exhausted by Q1’21. A new round of government spending in Q2’21 will support the US economy into the summer when wider vaccine distribution should enable activity to rebound from the current winter virus waves.
The Biden administration is also likely to propose a multi-year package of infrastructure and green investments to start later in 2021. This may be worth over USD2 trillion though the Democrats’ wafer-thin majorities in the new Congress may limit their scope for long-term action here.
Nevertheless, expected increased government spending in 2021 will likely boost the US economic recovery, support risk assets, push long-term Treasury yields higher and weaken the safe-haven USD further.
We thus raise our US GDP growth forecast for 2021 from 5.0% to 6.0% and lift our one-year estimate for 10Y Treasury yields from 1.20% to 1.50% (see tables overleaf). The chart shows 10Y yields have already jumped from 0.91% to 1.10% this year.
We also lower our USD forecasts further. We raise our one-year EURUSD view from 1.25 to 1.30 and lower our USDCNY estimate from 6.30 to 6.15.
We remain in the camp of ‘the US dollar reels as the world heals’. The USD - as a safe-haven currency - is still likely to weaken in a reflationary environment. It is too soon to worry that looser fiscal policy will become too much of a good thing for the USD by making the Federal Reserve start normalizing its very loose monetary policy.
Similarly, we upgrade our one-year AUDUSD forecast to 0.83 and USDCAD to 1.21. Global commodity demand should improve as the stronger US recovery allows commodity demand outside of China to play catch-up to steady demand from China. Better prospects of US infrastructure spending later this year are also supportive of commodities such as industrial metals and oil. All these in turn will likely benefit commodity currencies including AUD and CAD.
The main risk here is a surge in inflation causing the Federal Reserve to taper quantitative easing in 2021. But we expect the central bank will wait until 2022 given its new strategy of aiming for 2% inflation on average over the business cycle.Disclaimer applicable to recommendation
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