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%. 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.
Important information
This product may only be offered: (i) in Hong Kong, to qualified Private Banking Customers and Professional Investors (as defined under the Securities and Futures Ordinance); and (ii) in Singapore, to Accredited Investors (as defined under the Securities and Futures Act) and (iii) in the Dubai International Financial Center to Professional Clients (as defined under the Dubai Financial Services Authority rules) only. No other person should act on the contents of this document.This product may involve derivatives. Do NOT invest in it unless you fully understand and are willing to assume the risks associated with it. If you have any doubt, you should seek independent professional financial, tax and/or legal advice as you deem necessary.
Please carefully read and make sure that you understand all Risk Disclosures, Selling Restrictions, and Disclaimers. This document must be read together with the relevant Prospectus & Offering Documents &/or Key Fact Statement.
Disclaimer
This document is prepared by Bank of Singapore Limited (Co Reg. No.: 197700866R) (the “Bank”), is for information purposes only, and is not, by itself, intended for anyone other than the recipient. It may contain information proprietary to the Bank which may not be reproduced or redistributed in whole or in part without the Bank’s prior consent. It is not an offer or a solicitation to deal in any of the investment products referred to herein or to enter into any legal relations, nor an advice or by itself a recommendation with respect to such investment products. It does not have regard to the specific investment objectives, investment experience, financial situation and the particular needs of any recipient or customer. Customers should exercise caution in relation to any potential investment. Customers should independently evaluate each investment product and consider the suitability of such investment product, taking into account customer’s own specific investment objectives, investment experience, financial situation and/or particular needs. Customers will need to decide on their own as to whether or not the contents of this document are suitable for them. If a customer is in doubt about the contents of this document and/or the suitability of any investment products mentioned in this document for the customer, the customer should obtain independent financial, legal and/or tax advice from its professional advisers as necessary, before proceeding to make any investments.
The Bank, its Affiliates and their respective employees are not in the business of providing, and do not provide, tax, accounting or legal advice to any clients. The material contained herein is prepared for informational purposes and is not intended or written to be used, and cannot be used or relied upon for tax, accounting or legal advice. Any such client is responsible for consulting his/her own independent advisor as to the tax, accounting and legal consequences associated with his/her investments/transactions based on the client’s particular circumstances.
This document and other related documents have not been reviewed by, registered or lodged as a prospectus, information memorandum or profile statement with the Monetary Authority of Singapore nor any regulator in Hong Kong or elsewhere.
This document may not be published, circulated, reproduced or distributed in whole or in part to any other person without the Bank’s prior written consent. This document is not intended for distribution to, publication or use by any person in any jurisdiction outside Singapore, Hong Kong, or such other jurisdiction as the Bank may determine in its absolute discretion, where such distribution, publication or use would be contrary to applicable law or would subject the Bank and its related corporations, connected persons, associated persons and/or affiliates (collectively, “Affiliates”) to any registration, licensing or other requirements within such jurisdiction.
