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November 13, 2020
International Economics
International Economic Nick Bennenbroek, International Economist
nicholas.bennenbroek@wellsfargo.com
Outlook Brendan McKenna, International Economist
brendan.mckenna@wellsfargo.com
Jen Licis, Economic Analyst
jennifer.licis@wellsfargo.com
In this issue:
Forecast changes: With the resurgence in COVID cases across the United States and Europe, and the re-imposition of
restrictions, we believe the risk of an economic reversal has increased. In this context, we now see a renewed fall in Eurozone
GDP in Q4, while the risks to our medium-term EUR/USD exchange rate forecast are tilted to the downside. Also among
the G10 currencies, we expect the British pound to remain a laggard, but have made upward revisions to our forecasts for
the dollar-bloc currencies (Australia, Canada and New Zealand) as well as the Scandinavian currencies. Within the emerging
markets, we maintain our bullish outlook on the Chinese renminbi and the Mexican peso, and have become more positive
on the Brazilian real in the near-term.
Key themes: As expected, Q3 GDP data indicated record bounce backs across most G10 and emerging market economies.
The United States, Eurozone and U.K. were among the largest GDP increases. However, with the second wave of COVID
spreading rapidly across some countries, we have become more cautious on the global recovery. Given the uncertain
outlook, some global central banks have begun (or are expected) to ease monetary policy further, notably the Reserve Bank
of Australia, Bank of England and European Central Bank. As the monetary and fiscal policy setting remain accommodative,
and as the renewed spread of the virus comes under control, global growth should eventually gather pace. Despite the
resurgence in COVID cases, the outlook for foreign currencies is somewhat more positive on promising news about a COVID
vaccine, while uncertainty around the U.S. presidential election has also started to fade.
COVID Clouding the Global Outlook
Although the global economic recovery appears intact, the
As expected, the global economy experienced a healthy
resurgence of COVID cases across the northern hemisphere
rebound in Q3 as countries around the world eased lockdown
restrictions. Mobility and economic activity picked up is likely to complicate the global economic recovery. Global
confirmed cases crossed another milestone and pushed
sharply across the G10 and emerging markets, with most
above 52.8 million, while global fatalities are more than 1.2
economies realizing the largest quarterly expansions on
million. The “second wave” of infections has resulted in
record. To that point, the U.S. economy expanded 33.1% q/q
several countries re-imposing restrictions and many more
annualized, slightly better than consensus forecasts, while
considering lockdown measures once again, although likely
personal consumption rose 40.7% q/q annualized in the
not as stringent as in March and April. Activity and
third quarter, also better than expected. While the level of
sentiment data are reflecting this renewed wave in infections
real GDP still remains 3.5% below its Q4-2019 peak, the
and restrictions as well. Coincident indicators such as retail
latest GDP data in the U.S. reveals the economy is on pace to
sales and industrial production, as well as leading indicators
fully recover from the COVID-induced recession in the
like manufacturing and services PMIs, hint that the global
second half of 2021. In Europe, the Eurozone economy
economic recovery is losing some momentum heading into
surged 12.6% q/q (not annualized) with some of the larger
the end of the year. As concerns about the economic recovery
countries such as France and Italy posting sizeable gains. In
have re-emerged, we have revised down some of our growth
the United Kingdom, the economy grew at a record 15.5%
projections for full-year 2020 and still forecast sizable GDP
q/q (not annualized) despite still struggling with rising
declines in all of the G10 economies this year as well as in
confirmed case numbers and Brexit uncertainties hovering
most of emerging market economies.
over the economy. Emerging market economies were not
excluded from the Q3 recovery. China continues to lead the The Eurozone and United Kingdom in particular have
global economic rebound despite Q3 growth being slightly become a hotspot for new confirmed cases. COVID cases in
slower than forecast, while the Mexican economy managed the U.K. have accelerated sharply, with new cases exceeding
to outperform forecasts in Q3 and economic activity in Brazil 23,000 per day over the past week, higher than back in
continues to improve, supported by forceful fiscal and March/April when COVID first began to spike in the U.K. In
monetary stimulus. response, the U.K. government imposed partial restrictions,
including the closing of certain businesses and venues such
Please see the disclosure appendix of this publication for certification
and disclosure information.
All estimates/forecasts are as of 10/07/20 unless otherwise stated.
This report is available on wellsfargoresearch.com and on Bloomberg WFREWELLS FARGO SECURITIES
International Economic Outlook – November 2020 INTERNATIONAL ECONOMICS
as non-essential retail stores, accommodation, leisure and think the risks are tilted toward the ECB taking more, rather
sports facilities among other things. In response to new than less, policy action when it comes to monetary easing in
restrictions, we have revised our U.K. GDP forecast lower December.
and now expect the economy to contract 11.2% this year and
The ECB is not the only central bank easing monetary policy
for the British pound to lag relative to other foreign
further. In particular, the Reserve Bank of Australia opted to
currencies. Elsewhere in Europe, new cases in the
ease monetary policy at its November policy meeting,
Eurozone’s largest economies including France, Germany,
lowering its Cash Rate and three-year yield target 15 bps to
Spain and Italy have also resulted in new restrictions being
0.10%, as well as announced further quantitative easing
put in place, complicating the outlook for and disrupting the
measures. Specifically, RBA policymakers implemented
economic recovery across the broader European economy.
plans to purchase A$100B of government bonds of
Gloomy Eurozone Outlook & More Global Stimulus maturities of around five-to-10 years over the next six
The Eurozone economy has been hit particularly hard by the months. Meanwhile, the Bank of England (BoE) also
resurgence of COVID. Specifically, new cases have increased unleashed further monetary stimulus measures at its most
by roughly 143,000 cases per day across the Eurozone over recent November meeting, in an effort to support economic
the past week (see chart below). In response, several activity amid the re-imposition of COVID restrictions. The
Eurozone governments have re-imposed partial restriction central bank announced a larger-than-expected £150 billion
measures, which are primarily aimed toward restaurants, increase in its asset purchase target to £895 billion. The
bars, theaters, sports and cultural institutions. Although the additional bond purchases are expected to begin in January
restrictions are not yet as stringent as the lockdown 2021 and continue until the end of 2021.
measures seen in the first half of this year, we expect these
Currency Math. Adding it All Up.
new measures to lead to a renewed decline in activity in late
While the nature of the global recovery has become slightly
2020. Recent data have already hinted at the rebound losing
more complex and uncertain, we are still bearish on the
momentum as September retail sales declined 2% m/m,
prospects for the U.S. dollar. Just this week, we received
while sentiment indicators also point to slower growth. In
positive news on the progress of a COVID vaccine as well as
October, the services PMI fell to 46.9, the second consecutive
additional treatments. Progress on the health front, coupled
month below the breakeven 50 level. As a result of the new
with aggressive and persistent monetary and fiscal stimulus,
restrictions being put in place and subpar economic
has supported market sentiment and created an attractive
performance, we look for a renewed decline in Eurozone Q4
environment for market participants to increase exposure to
GDP growth, now forecasting a 3% q/q fall, and look for the
risk-sensitive currencies and avoid traditional safe haven
economy to contract 7.4% for full year 2020.
currencies such as the Japanese yen, Swiss franc and U.S.
Eurozone COVID-19 Cases dollar. While these dynamics continue, it should continue to
180,000 Daily new confirmed cases, 7-day place downward pressure on the greenback and fuel broad
average momentum and risk taking across G10 and emerging market
currencies. In this context, we now expect broad emerging
market currency strength and have revised our forecast to
reflect a firmer Brazilian real and Chilean peso, currencies
120,000 we previously held a more negative view. However, given the
downward revisions to the Eurozone and U.K. economies, we
expect the euro and pound to lag the foreign currency
strength trend.
60,000 Over the medium-to-longer term, we expect the global
economic recovery to persist, with international economies
leading the growth charge in a post-COVID world, which we
believe should also contribute to a weaker U.S. dollar. Equity
0
markets and foreign currencies have responded positively to
Joe Biden being declared the winner of the U.S. election. As
of now, it appears he will lead with a divided Congress, which
Source: Bloomberg LP, Wells Fargo Securities should result in no major policy changes, particularly
adjustments to tax policy. In addition, a Biden White House
Given the less than certain outlook, the European Central could take a more conciliatory approach to China—with
Bank (ECB) made it clear at its last monetary policy meeting respect to tariffs and other China trade barriers implemented
that further easing is likely at its December meeting. We now under the Trump administration—which should all be
look for the ECB to announce a €500B increase in Pandemic supportive of global growth and keep investor sentiment
Emergency Program purchases, to a total program size of positive. In this environment, the longer-term outlook for
€1.850 trillion. We also expect the ECB to extend its foreign currencies remains positive as safe haven demand for
purchase program through until at least December 2021. the U.S. dollar should recede over the course of 2021 and into
Although it may not be formally announced, we would not be 2022. In particular, we are somewhat more upbeat on the
surprised to see an increase in the weekly pace of purchases dollar-bloc currencies (Canada, Australia and New Zealand)
ahead of or surrounding the December meeting. An even along with the Scandinavian currencies. In emerging
larger increase in asset purchases is possible, as is a further markets, we continue to stress selectivity and remain positive
adjustment or addition of targeted long-term lending on the Chinese renminbi and currencies associated with
programs or a reduction in the deposit rate, although those strong underlying fundamentals and stable politics.
are not part of our base case scenario. In any case, we still
2WELLS FARGO SECURITIES
International Economic Outlook – November 2020 INTERNATIONAL ECONOMICS
Global Economic Forecasts
GDP CPI
2019 2020 2021 2022 2019 2020 2021 2022
Global (PPP Weights) 2.8% -4.0% 5.6% 3.5% 3.5% 3.2% 3.1% 3.3%
Advanced Economies1 1.7% -5.2% 3.9% 3.0% 1.4% 0.8% 1.3% 1.6%
United States 2.2% -3.5% 4.2% 2.8% 1.8% 1.2% 1.9% 2.0%
Eurozone 1.3% -7.4% 3.7% 2.9% 1.2% 0.3% 0.7% 1.1%
United Kingdom 1.5% -11.2% 2.5% 2.9% 1.8% 0.9% 1.4% 1.6%
Japan 0.7% -5.8% 2.4% 2.0% 0.5% 0.1% 0.1% 0.6%
Canada 1.7% -5.6% 4.2% 2.8% 1.9% 0.6% 1.7% 2.0%
Switzerland 1.2% -4.3% 2.6% 1.8% 0.4% -0.7% 0.1% 0.5%
Australia 1.8% -3.6% 2.7% 3.0% 1.6% 0.7% 1.6% 1.8%
New Zealand 2.2% -5.2% 5.3% 3.3% 1.6% 1.4% 1.6% 1.8%
Sweden 1.3% -4.0% 3.6% 3.2% 1.6% 0.6% 1.2% 1.4%
Norway 1.2% -3.8% 3.6% 2.5% 2.2% 1.4% 2.3% 2.0%
Developing Economies1 3.7% -3.0% 7.0% 4.0% 5.1% 5.0% 4.4% 4.6%
China 6.1% 2.2% 9.5% 5.8% 2.9% 2.8% 2.0% 2.3%
India 4.2% -9.0% 9.9% 5.8% 4.8% 6.3% 4.4% 4.6%
Mexico -0.3% -9.2% 3.3% 2.8% 3.6% 3.5% 3.8% 3.5%
Brazil 1.1% -5.7% 3.8% 2.7% 3.7% 2.6% 3.0% 3.4%
Forecast as of: November 13, 2020. All figures represent year-over-year percent change
1
Aggregated Using PPP Weights
Interest Rate Forecasts
Instrument Current rate Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022
United States
Fed Funds (Upper Bound) 0.25 0.25 0.25 0.25 0.25 0.25 0.25
2-Year 0.18 0.15 0.20 0.20 0.20 0.25 0.25
10-Year 0.96 0.85 1.00 1.10 1.20 1.30 1.35
Eurozone
ECB Deposit Rate -0.50 -0.50 -0.50 -0.50 -0.50 -0.50 -0.50
2-Year -0.72 -0.70 -0.70 -0.65 -0.60 -0.50 -0.45
10-Year -0.49 -0.55 -0.40 -0.30 -0.20 -0.15 -0.10
United Kingdom
Bank Rate 0.10 0.10 0.10 0.10 0.10 0.10 0.10
2-Year 0.01 -0.05 0.00 0.05 0.10 0.15 0.15
10-Year 0.40 0.30 0.40 0.45 0.50 0.55 0.60
Japan
Policy Rate Target -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10
2-Year -0.12 -0.10 -0.05 0.00 0.05 0.05 0.05
10-Year 0.05 0.05 0.10 0.10 0.15 0.15 0.15
Canada
Overnight Rate Target 0.25 0.25 0.25 0.25 0.25 0.25 0.25
2-Year 0.29 0.30 0.35 0.35 0.35 0.40 0.40
10-Year 0.80 0.75 0.90 1.00 1.05 1.15 1.20
Source: Bloomberg LP and Wells Fargo Securities
3WELLS FARGO SECURITIES
International Economic Outlook – November 2020 INTERNATIONAL ECONOMICS
Currency Forecasts
Currency
Pair* Current rate Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022
G10
EUR/USD 1.1817 1.1800 1.1800 1.1900 1.2000 1.2100 1.2200
USD/JPY 104.85 105.00 106.00 107.00 108.00 109.00 109.00
GBP/USD 1.3161 1.3200 1.3300 1.3400 1.3500 1.3600 1.3600
USD/CHF 0.9142 0.9200 0.9200 0.9150 0.9075 0.9100 0.9100
USD/CAD 1.3143 1.3000 1.2800 1.2600 1.2500 1.2400 1.2400
AUD/USD 0.7244 0.7300 0.7500 0.7700 0.7800 0.7900 0.7900
NZD/USD 0.6826 0.6900 0.7000 0.7100 0.7200 0.7300 0.7300
USD/NOK 9.1557 9.1525 9.1100 8.9925 8.8325 8.6775 8.5250
USD/SEK 8.6848 8.6025 8.5175 8.3625 8.2500 8.1400 8.0325
Asia
USD/CNY 6.6097 6.6000 6.5600 6.5200 6.4800 6.4400 6.4000
USD/CNH 6.6144 6.6000 6.5600 6.5200 6.4800 6.4400 6.4000
USD/IDR 14170 14000 13800 13600 13400 13200 13000
USD/INR 74.60 74.25 75.00 76.00 77.00 78.00 79.00
USD/KRW 1115.72 1110.00 1090.00 1080.00 1070.00 1060.00 1050.00
USD/PHP 48.22 48.25 48.00 47.75 47.50 47.25 47.00
USD/SGD 1.3488 1.3500 1.3400 1.3300 1.3200 1.3100 1.3000
USD/TWD 28.51 28.50 28.50 28.25 28.25 28.00 28.00
USD/THB 30.17 30.00 30.00 29.75 29.50 29.25 29.00
Latin America
USD/BRL 5.4652 5.4000 5.5000 5.6000 5.7000 5.8000 5.9000
USD/CLP 766.72 750.00 750.00 775.00 800.00 825.00 850.00
USD/MXN 20.5313 20.2500 20.0000 19.7500 19.5000 19.2500 19.0000
USD/COP 3644.57 3600.00 3500.00 3400.00 3300.00 3200.00 3100.00
USD/ARS 79.7136 82.0000 84.0000 86.0000 88.0000 90.0000 92.0000
USD/PEN 3.6424 3.6600 3.6900 3.6700 3.6500 3.6300 3.6100
Eastern Europe/Middle East/Africa
USD/CZK 22.40 22.50 22.00 21.50 20.75 20.25 19.75
USD/HUF 301.05 296.50 292.25 285.75 279.25 272.75 266.50
USD/PLN 3.8002 3.7975 3.7875 3.7475 3.7075 3.6700 3.6300
USD/RUB 77.65 78.00 81.00 79.00 77.00 75.00 73.00
USD/ILS 3.3677 3.3600 3.3400 3.3200 3.3000 3.2800 3.2600
USD/ZAR 15.5641 15.2500 15.5000 16.0000 16.5000 17.0000 17.5000
USD/TRY 7.7023 8.0000 8.1000 8.2000 8.3000 8.4000 8.5000
Euro Crosses
EUR/JPY 123.90 124.00 125.00 127.25 129.50 132.00 133.00
EUR/GBP 0.8979 0.8950 0.8875 0.8875 0.8875 0.8900 0.8975
EUR/CHF 1.0802 1.0850 1.0850 1.0900 1.0900 1.1000 1.1100
EUR/NOK 10.8188 10.8000 10.7500 10.7000 10.6000 10.5000 10.4000
EUR/SEK 10.2624 10.1500 10.0500 9.9500 9.9000 9.8500 9.8000
EUR/CZK 26.47 26.50 26.00 25.50 25.00 24.50 24.00
EUR/HUF 355.73 350.00 345.00 340.00 335.00 330.00 325.00
EUR/PLN 4.4905 4.4800 4.4700 4.4600 4.4500 4.4400 4.4300
Source: Bloomberg LP and Wells Fargo Securities
* Charts show forecast trajectory for the currency pair over the next 18 months.
4WELLS FARGO SECURITIES
International Economic Outlook – November 2020 INTERNATIONAL ECONOMICS
United States/USD
Outlook
We expect a gradual softening in the U.S. dollar over the medium-term. The economy continues to expand at a respectable rate,
although the renewed spread of COVID poses some risk to the pace of that upswing, as do questions about the extent of timing
of any further fiscal stimulus. Given increased longer-term hopes surrounding COVID and continued easy U.S. monetary policy,
we expect an ongoing constructive market mood should translate to softness in the U.S. currency.
Fundamental Focus: Economics, Policy & FX Economic & FX Risks
U.S. Economic Growth Downside FX Scenario
8% % year/year
U.S. ISM Surveys
65
4%
60
0%
55
-4%
50
GDP
-8% 45
Final private
domestic demand
-12% 40
ISM Manufacturing
ISM Services
35
Source: Datastream, Wells Fargo Securities
U.S. Economy Still Making Steady Progress Source: Datastream, Wells Fargo Securities
Q3 GDP grew and impressive 33.9% q/q annualized, Our base case is for gradual U.S. dollar softness over time,
although that still did not fully recover the contraction in as market sentiment and global growth improve,
the economy in the first half of this year. Growth in lessening safe-haven support for the greenback.
consumer spending was particularly strong, rising 40.7% There is some risk of faster greenback depreciation, even
q/q annualized. with the economy performing respectably for now. The
Higher frequency activity and confidence data suggest prospects for fiscal stimulus appear to have lessened (both
U.S. growth maintained reasonable momentum heading in magnitude and timing) in the current political
into Q4. September real consumer spending rose 1.2% environment. Ultimately, the Fed may feel compelled to
m/m, although industrial output fell 0.6% m/m. increase the pace of its asset purchases further the longer
With respect to survey data, the October ISM that persists.
manufacturing rose more than expected to 59.3, well into The renewed spread of COVID cases raised some risk of
growth territory, while the ISM services index fell renewed restrictions which would restrain U.S. economic
moderately to 56.6. growth, at least in the near-term. That period of
The October jobs report was also upbeat. Private nonfarm uncertainty could also weigh more than expected on the
payrolls rose 906,000, more than expected, while the U.S. dollar.
jobless rate fell to 6.9%. Recent progress on treatment and vaccines for COVID
With some moderation expected to a to respectable pace have improved the longer-term outlook for growth and
of growth, we forecast full year 2020 GDP to decline 3.5% markets, but is potentially a longer-term negative for the
before expanding by 4.2% in 2021. greenback.
Fading Fiscal Stimulus Hopes? Central Bank Outlook
While we are still awaiting full and final results from the Fed Funds Rate forecast
U.S. election, Democratic candidate Joe Biden appear to Current: 0.125% 3M 6M 12M
have secured the presidential election. Democrats kept
Wells Fargo 0-0.25% 0-0.25% 0-0.25%
control of the House and, while the fate of the Senate is
still uncertain, it seems to leaning towards Republican Market Implied 0.11% 0.11% 0.10%
control. Source: Bloomberg LP, Wells Fargo Securities
The most significant implication of the U.S. election is The Federal Reserve held monetary policy steady at its
perhaps a less likely or sizeable fiscal stimulus package, early November announcement. We expect the fed funds
especially ahead of the January inauguration. Limited rate to remain steady at least through the end of 2022,
fiscal policy action should encourage the Fed to maintain though we do see some risk of an increase in the pace of
accommodative monetary policy. asset purchases at some point.
5WELLS FARGO SECURITIES
International Economic Outlook – November 2020 INTERNATIONAL ECONOMICS
Eurozone/EUR
Outlook
We are cautious on the euro in the near-term, but expect moderate gains in the euro over time. Given a renewed surge in COVID
cases and the re-imposition of restriction, we foresee a renewed decline in GDP in Q4. The more uncertain outlook means
December monetary easing is a strong likelihood, which should restrain the euro for now. Still, with further and monetary and
fiscal stimulus over time and growth firming, we expect the euro to gain modestly versus the greenback over the medium-term.
Fundamental Focus: Economics, Policy & FX Economic & FX Risks
Eurozone GDP Growth Downside Scenario
15%
Eurozone PMI Indices
10% % quarter/quarter 60
% year/year
5%
50
0%
40
-5%
30
Services PMI
-10%
Manufacturing PMI
20
-15%
10
Source: Datastream, Wells Fargo Securities
Two Steps Forward, One Step Back for the Eurozone Source: Bloomberg LP, Wells Fargo Securities
The Eurozone economy enjoyed a strong rebound in the Our base case is for gradual euro appreciation over the
third quarter, as Q3 GDP rose 12.6% q/q, while the annual medium-term. However, there is a risk that COVID cases
decline slowed to 4.4% y/y. For the region’s major surge even more than expected across the Eurozone,
economies, German GDP rose 8.2% q/q, while French which could lead to more significant or longer lasting
GDP jumped 18.2% q/q and Italian GDP jumped 16.1% restrictions.
q/q. To provide support to the economy, the ECB could boost
However, with a resurgence in the spread of COVID cases asset purchases more than expected, or perhaps even
and the imposition of renewed restrictions, the economy reduce already negative interest rates. In the softer
has stumbled heading into Q4. Eurozone September economic and easier monetary policy scenario, the euro
retail sales fell 2% m/m, while industrial output fell 0.4% may not gain much past $1.2000
m/m.
Upside Scenario
More notably, confidence surveys have softened
markedly. The October services PMI fell to 46.9, and has The resurgence in cases could also subside more rapidly
been back below the breakeven 50 level for two months. than expected, allowing Eurozone governments to lift
That dragged the overall composite PMI down to 50.0, restrictions more quickly. The euro might benefit
even as the manufacturing PMI rose to 54.8. modestly from favorable market sentiment as COVID
We now see a stronger Eurozone recovery delayed until treatments and vaccines are identified and distributed.
later in 2021. We forecast Q4 GDP to fall 3% q/q, and for Reduced uncertainty, a better growth outlook, and
the economy to contract 7.4% for full-year 2020. perhaps greater monetary policy traction in this scenario
could see the euro gain to a $1.2500-$1.3000 range over
European Central Bank Readies for More Easing
time.
The ECB held monetary policy steady in late October, but
gave a very clear signal further easing should be Central Bank Outlook
forthcoming at its December 10 announcement. ECB Deposit Rate forecast
The central bank said economic risks were clearly tilted to Current: -0.50% 3M 6M 12M
the downside, that policymakers agreed it was necessary Wells Fargo -0.50% -0.50% -0.50%
to take action and there was “little doubt” the ECB would
Market Implied -0.53% -0.54% -0.57%
act in December.
Source: Bloomberg LP, Wells Fargo Securities
We expect the ECB to announce a €500 billion increase in
Pandemic Emergency asset purchases in December, to a We expect further ECB easing in December, but beyond
program size of €1.850 trillion, and extend the purchase that we do not forecast lower rates or further asset
program through until December 2021. purchases during 2021 and 2022.
6WELLS FARGO SECURITIES
International Economic Outlook – November 2020 INTERNATIONAL ECONOMICS
Japan/JPY
Outlook
Our outlook remains for moderate weakness in the yen over time. Rising bond yields internationally could weigh on the yen
given relatively stable Japanese yields, while a constructive equity environment would typically weigh on the yen as well. Still,
yen softness could be more modest than usual given the less consistent safe-haven characteristics on the yen in 2020, while a
relatively steady Japanese economy could also limit the extent of yen weakness.
Fundamental Focus: Economics, Policy & FX Economic & FX Risks
Japan Retail Sales & Industrial Output Upside FX Scenario
12% % year/year 10%
Yen Correlation with Equities, Yield Spreads
rolling yearly correlation of weekly changes
25%
0% 0%
0%
-12% -10%
-25%
-50%
-24% -20%
Retail sales, left
Industrial output, right
-75%
U.S./Japan 10-Year Yield Spread
-36% -30%
MSCI Global Equity Index
-100%
Source: Datastream, Wells Fargo Securities
Japan’s Economy Remains on Gradual Recovery Source: Bloomberg LP, Wells Fargo Securities
Course We see gradual softness in the yen versus the U.S. dollar.
The incoming flow of data point to a continued but There is however some risk of stability or even modest
gradual recovery in Japan’s economy. strength versus the greenback. As noted previously,
Manufacturing activity is advancing steadily. September Japan’s economic recovery is reasonably steady and we do
industrial output rose 4% m/m, more than expected, not anticipate any further easing from Japan’s central
while the October manufacturing PMI rose to 48.7. bank.
The recovery in services activity is a bit more gradual. As we have noted frequently in 2020, the yen has not
September retail sales unexpectedly dipped 0.1% m/m, displayed its historically reliable safe-haven
although that came after a 4.6% gain in August. The characteristics over the past several months. Thus, even if
October services PMI rose to 47.7, while October market sentiment improves as COVID is addressed more
consumer confidence edged barely higher to 33.9. effectively across the globe, it might not be that negative
Consumer fundamentals are relatively solid given the for the yen.
government’s fiscal stimulus efforts. Real household Downside FX Scenario
disposable income rose 10% q/q in Q2, while the
household saving rate jumped to 23.1%. On the flip side, the yen continues to be influenced by U.S
We expect Japan’s GDP to shrink 5.8% in 2020, and rise versus Japanese yields. In a more upbeat economic
a moderate 2.4% in 2021. environment, that would weigh on Japan’s currency.
Given the unusual yen/equities relationship this year, a
Bank Of Japan Comfortably on Hold
reversion to historical norms could also see the yen
The Bank of Japan held monetary policy steady at its late weaken. In this scenario, the USD/JPY exchange rate
October meeting, while also lowering its forecasts for GDP could trade as high as JPY110.00-112.00.
growth and CPI inflation.
Central Bank Outlook
The central bank does not appear to be excessively
concerned about the yen’s relative sturdiness versus the BoJ Policy Rate forecast
greenback. Recent comments from Bank of Japan Current: -0.10% 3M 6M 12M
governor Kuroda on the yen have been relatively benign. Wells Fargo -0.10% -0.10% -0.10%
He said that currency markets have been moving in a
Market Implied -0.05% -0.06% -0.07%
relatively stable manner, and that it was desirable for
Source: Bloomberg LP, Wells Fargo Securities
currencies to reflect economic fundamentals.
The central bank said it would ease monetary policy While the Bank of Japan has a mild easing bias we—along
further if needed, although our outlook is for steady with implied market pricing—see change in monetary
monetary policy over the medium-term. policy over the next 12 to 24 months.
7WELLS FARGO SECURITIES
International Economic Outlook – November 2020 INTERNATIONAL ECONOMICS
United Kingdom/GBP
Outlook
We expect a steady pound in the near-term and a moderately firmer pound over the medium-term. Recent central bank monetary
easing, a likely decline in Q4 GDP and Brexit uncertainties that are unlikely to be resolved until the “eleventh hour” are all near-
term restraints for the U.K. currency. As growth gradually improves next year and should the global backdrop remain stable the
pound should gain modestly versus the greenback over time, but would remain a laggard among the G10 currencies.
Fundamental Focus: Economics, Policy & FX Economic & FX Risks
U.K. GDP, Consumer & Investment Spending Upside Scenario
6% % year/year 12%
GBP & IMM Positioning
70 1.43
0% 0% GBP/USD
-6% -12%
1.36
0
-12% -24%
GDP, left
1.29
-18% Private consumption, left -36%
Business investment, right
-70
-24% -48%
1.22
-30% -60%
Net contracts, '000s
-140 1.15
Source: Datastream, Wells Fargo Securities
U.K. Economic Struggles to Persist
Source: Bloomberg LP, Wells Fargo Securities
U.K. Q3 GDP rebounded an impressive 15.5% q/q as the
Our outlook envisages only a gradual gain in the pound
economy re-opened, though that was still only a partial
versus the U.S. dollar over the medium-term. However,
recovery of the severe decline seen earlier this year.
there is some risk of a faster rate of appreciation.
Consumer spending jumped 18.3% q/q, while business
While there are only limited signs of progress so far, our
investment rose a more modest 8.8% q/q.
base case remains that a trade-deal is reached between the
There were signs of slowing momentum as the quarter
U.K. and European Union by December 31. Among the
came to a close. September monthly GDP rose 1.1% m/m,
more encouraging recent headlines, there is talk of
as services output rose 1% m/m and industrial output rose
progress on the issues of European access to U.K.
0.5% m/m.
fisheries.
In October, the manufacturing PMI eased to 53.7, while
The rebound in U.K. activity has struggled to gain much
the services PMI fell to 51.4.
momentum so far. However, another round of fiscal and
With the spread of COVID rising, the U.K. government has
monetary stimulus delivered in early November has the
re-imposed restrictions that will last at least until early
potential to reinforce the rebound as 2021 progresses.
December, but could be extended further.
FX positioning is modestly short for the pound. If the
We anticipate a renewed decline in U.K. GDP in the fourth
economic data were to show a firmer tone in the months
quarter. For 202o we expect the U.K. economy to contract ahead, the pound could appreciate faster than we
11.2%, while for 2021 we see only modest growth of 2.5%. currently expect over the medium-term, perhaps to close
Bank of England Eases Monetary Policy Further to $1.4000.
Given the softer growth outlook the Bank of England Central Bank Outlook
(BoE) eased monetary policy further in November to
provide support to the economy. The central bank Bank Rate forecast
increased its asset purchase target by £150B to £895B, Current: 0.10% 3M 6M 12M
and said it expects those additional asset purchases to run Wells Fargo 0.10% 0.10% 0.10%
from January through December of next year. Given an Market Implied 0.08% 0.06% 0.01%
expected eventual improvement in the economy and with Source: Bloomberg LP, Wells Fargo Securities
bond purchases already set to run through all of 2021, we
The Bank of England held its policy rate at 0.10% in
do not expect the BoE to ease monetary policy further.
November. While the central bank has at times continued
Separately, the U.K. government extended its salary
to discuss the possibility of negative interest rates, we
replacement program through until the end of March
ultimately expect the central bank to keep rates steady for
2021, as well as some additional help for the self-
the next two years.
employed and local businesses.
8WELLS FARGO SECURITIES
International Economic Outlook – November 2020 INTERNATIONAL ECONOMICS
Switzerland/CHF
Outlook
We expect a broadly steady franc against the U.S. dollar, but a moderately weaker franc versus the euro, over the medium term.
The Swiss economy has continued on a recovery path, although a renewed uptick in COVID cases could pose some headwinds.
Still, monetary policy is likely on hold for now suggesting global market sentiment should remain an important franc driver.
Should markets continue to improve, that should restrain the franc against the euro, as well as the U.S. dollar.
Fundamental Focus: Economics, Policy & FX Economic & FX Risks
140 Swiss Leading Indicators 80 Downside FX Scenario
EUR/CHF Correlation with Global Equities
75% rolling yearly correlation of weekly % change
110 60
50%
80 40 25%
KOF Index,
left
Manufacturing
PMI, right 0%
50 20
-25%
Source: Bloomberg LP, Wells Fargo Securities
Swiss Economic Outlook Remains Cautiously Positive Source: Datastream, Wells Fargo Securities
Recent activity and confidence data have softened a touch, We forecast a reasonably steady Swiss franc versus the
but remain consistent with an economy on an overall U.S. dollar and weakness in the franc against the euro over
upwards trajectory. the medium-term.
The KOF leading indicator fell to 106.6 in October, but is There is some risk of a softer franc versus both the euro
still near the highest levels seen over the past decade. The and the U.S. dollar.
October manufacturing PMI fell to 52.3, still above the The franc’s moves versus the greenback are highly
breakeven 50 level and consistent with positive growth. correlated to the euro’s moves with the U.S. dollar. To the
September real retail sales slowed, but growth remained extent the euro remains restrained given a subdued near-
positive at 0.3% y/y. term Eurozone outlook, that could also restrain the franc.
September trade were mixed. Real exports fell 2.1% m/m, Over time, improving market sentiment could also weigh
perhaps reflecting external risks emanating from the on the Swiss currency. As treatments and vaccines for
Eurozone and United Kingdom. Real imports rose 2.1% COVID are identified, more favorable market economic
m/m, perhaps reflecting a steadier domestic Swiss conditions should see safe-haven support for the franc
economy. weaken. That should result in broad Swiss currency
On the price front, inflationary pressures are absent, softness.
though deflationary pressures do not appear to be A near-term risk to the Swiss economy and currency is a
intensifying. recent pickup in COVID cases locally, which has added an
The October CPI fell 0.6% y/y, a smaller decline than in extra element of uncertainty to the outlook.
September. The trimmed mean CPI was steady at 0.1% y/y If global markets recover while the Swiss economy
in September. Separately, October producer and import disappointed, the EUR/CHF exchange rate could rise to a
prices fell 2.9% y/y. CHF1.12-1.14 range.
Largely Quiet on the Central Bank Front Central Bank Outlook
The past few weeks have been relatively quiet in terms of
SNB Policy Rate forecast
central bank activity and rhetoric.
Current: -0.75% 3M 6M 12M
Foreign exchange reserves fell just 2.04B francs in
October to 871.5B francs, following a large increase in Wells Fargo -0.75% -0.75% -0.75%
September. Market Implied -0.79% -0.75% -0.76%
After highlighting the importance of negative interest Source: Bloomberg LP, Wells Fargo Securities
rates and the possibility of lower interest rates through We are in line with the consensus forecast, as well as
much of 2020, Swiss National Bank policymakers have market implied pricing, in anticipating no change to the
been largely quiet on rate policy the past month. current SNB policy rate of -0.75% over the next 12 months.
9WELLS FARGO SECURITIES
International Economic Outlook – November 2020 INTERNATIONAL ECONOMICS
Canada/CAD
Outlook
We have a constructive outlook for the Canadian dollar over the medium-term. Economic themes are encouraging, including a
positive initial upturn in growth, the prospect of continued expansionary fiscal policy and only a modest uptick in the spread of
COVID. Given a rise in commodity prices and global equities, the key drivers for the Canadian dollar are favorable, which we
expect the Canadian dollar to appreciate versus the greenback over time.
Fundamental Focus: Economics, Policy & FX Economic & FX Risks
Canadian Economic Growth Upside Scenario
10% % year/year
Canadian Dollar and Commodity Prices
5% 1,000 0.70
Bank of Canada Commodity
Prices, left
0% USD/CAD exchange rate,
785 inverted, right 0.90
-5%
-10% GDP 570 1.10
Services
-15% Industrial output
355 1.30
-20%
-25% 140 1.50
Source: Datastream, Wells Fargo Securities Source: Datastream, Wells Fargo Securities
Economy Maintains Reasonable Momentum We view the risks as tilted to faster Canadian dollar
While the pace of Canada’s rebound has slowed a touch, appreciation than we currently forecast.
the economy maintains steady forward momentum Although there has been some uptick in COVID cases in
heading in the latter part of 2020. Canada, it has been far less severe than in the United
August GDP rose 1.2% m/m, a bit more than expected. States and Europe. As a result, we believe the economy is
Services output rose 1.5% m/m, while industrial output well placed to sustain its rebound, especially given
edged up 0.1% m/m. For the third quarter, Statistics encouraging COVID treatment and vaccine news.
Canada expects GDP to rise around 10% q/q (not Oil prices have also moved higher on a more optimistic
annualized). global outlook. We continue to view the current level of
The encouraging improvement in the labor market has commodity prices as an overall positive for the Canadian
also continued. October employment rose by 83,600, as dollar.
full-time jobs rose 69,100 and part-time jobs rose 14,500. The government has signaled it will maintain an
The unemployment rate dipped to 8.9%. expansive fiscal policy, with a budget update expected to
The Bank of Canada’s Q3 Business Conditions Survey be released later in November.
showed an increase in the future sales balance to +39, Given encouraging local and global trends, and with FX
suggesting the economic recovery will persist into Q4. positioning suggesting scope for Canadian dollar gains, an
The October manufacturing PMI also rose modestly to upside scenario for the Canadian currency could see
54.5. USD/CAD trade towards the lower end of a CAD1.2000-
We forecast Canada’s GDP to contract 5.6% in 2020, but 1.2500 range.
rise a relatively solid 4.2% in 2021. Central Bank Outlook
Inflation trends are also quite well behaved. Headline CPI
inflation is a touch low at 0.5% y/y in September, but the Overnight Rate forecast
central bank’s core inflation measures are only slightly Current: 0.25% 3M 6M 12M
below the 2% inflation target. Wells Fargo 0.25% 0.25% 0.25%
Bank of Canada Comfortably on Hold Market Implied 0.29% 0.28% 0.31%
The Bank of Canada held its policy rate steady at 0.25% in Source: Bloomberg LP, Wells Fargo Securities
October, and said it would gradually slow the pace of its We expect Canadian policy interest rates to remain steady
government bond purchases to C$4B per week. through 2021 and 2022, while we also expect the central
The central bank continues to wind down its other bank to continue gradual winding down its non-
programs, the latest being an end to the provincial money conventional monetary policy programs.
market purchase program.
10WELLS FARGO SECURITIES
International Economic Outlook – November 2020 INTERNATIONAL ECONOMICS
Australia/AUD
Outlook
We have become more positive on the Australian dollar, now looking for some moderate outperformance over time. The
currency has strengthened somewhat over the past month given the promising news on the COVID vaccine front, while a rise
in commodity prices has also helped the currency. Additionally, with the growth supportive effects of further stimulus measures
from the RBA and as Australian lockdown restrictions are eased, we expect the currency to gain over the longer-term.
Fundamental Focus: Economics, Policy & FX Economic & FX Risks
RBA Cumulative Purchases Upside Scenario
70,000 Millions
In the case where the renewed spread of COVID is
60,000
contained, or perhaps a treatment or vaccine is
50,000 distributed, global sentiment should continue to improve,
and equity markets would likely gain on the positive news
40,000
headlines. In addition, uncertainty around the U.S.
30,000 presidential election has started to fade, which has been
20,000
beneficial for the risk-sensitive Australian dollar. In this
scenario, we could expect to see the Australian dollar
10,000
strengthen to as high as $0.8500.
0
Downside Scenario
Source: Bloomberg LP, Wells Fargo Securities Over the past month, trade tensions between China and
Uneven Recovery Across Australia Australia worsened as China—the largest destination for
After the second wave of COVID cases in Victoria, the exports from Australia last year—ordered traders to halt
spread of the virus appears to now be receding, prompting purchases of many Australian imports including coal,
Victoria to ease its lockdown restrictions. However, barely, copper ore and concentrate, sugar, timber wine
despite progress being made on a health front, the and lobster. These industries have already been hit hard
economic recovery remains uncertain and is likely to be by the weakened demand from the COVID pandemic, and
uneven. Indeed, the uncertain and uneven nature of the any escalation could harm the industries further.
recovery has been most evident in the labor market. In Central Bank Outlook
September, Australian employment fell—although by less Cash Rate forecast
than expected—due to state restrictions in Victoria Current: 0.10% 3M 6M 12M
weighing on the recovery. Nationally, employment fell by
Wells Fargo 0.10% 0.10% 0.10%
29,500 after three months of positive gains, while the
unemployment rate increased to 6.9%. Market Implied 0.08% 0.09% 0.09%
The somewhat uneven recovery has also been evident in Source: Bloomberg LP, Wells Fargo Securities
the retail sector. Australian retail sales declined 1.1% m/m At its November policy meeting, the Reserve Bank of
in September, following a 4% decline in August. However, Australia (RBA) eased monetary policy in an effort to
on a quarterly basis, real retail sales rose by a record 6.5% support job creation and drive the Australian economic
q/q driven by a recovery in cafes, restaurants and recovery. The central bank lowered its Cash rate and
takeaway food services, and clothing, footwear and three-year yield target 15 bps to 0.10%, in line with our
personal accessory retailing. expectations, as well as reduced the interest rate on
Other data have been mixed. Australia’s leading economic Exchange Settlement balances to zero from 0.10%. In
index slowed to 0.22% in September, while business addition, the RBA announced further quantitative easing
confidence rose five points to -10 in Q3, but remains well measures, indicating its plans to purchase A$100B of
below last year’s average. Business conditions rose one government bonds of maturities of around five to 10 years
point in October, while confidence jumped to +5 and over the next six months. In Governor Lowe’s comments,
consumer confidence increased for a third straight month he noted that the RBA will continue to monitor the
to 107.7, the highest since 2013. economic situation and the impact of the central bank’s
Meanwhile, inflation rebounded in Q3 due in part to purchases on market functioning, indicating the RBA is
higher oil prices. Headline CPI increased more than prepared to adjust the size of its purchases if necessary. At
expected, rising 0.7% y/y, while underlying inflation also this time, we do not anticipate any further easing from the
beat expectations, with the trimmed mean CPI rising 1.2% RBA and look for rates to remain steady at a record low of
y/y. 0.10% through next year and into 2022.
11WELLS FARGO SECURITIES
International Economic Outlook – November 2020 INTERNATIONAL ECONOMICS
New Zealand/NZD
Outlook
We see potential for some New Zealand dollar strength given the recent positive vaccine news as well as uncertainty around the
U.S. presidential election dissipating. In addition, New Zealand appears to have largely contained the local spread of COVID
and with the New Zealand economy continuing to re-open and as the growth recovers, we could see the NZ dollar reach
$0.73000 by Q1-2022.
Fundamental Focus: Economics, Policy & FX Economic & FX Risks
N Zealand Labor Market
New 7%
Upside Scenario
6% Recent progress on the health front, has supported market
sentiment and created an attractive environment for
6%
market participants to increase exposure to risk-sensitive
3% currencies. Should a vaccine occur quicker than currently
5% expected, we see risks to our current NZ dollar forecast as
tilted to the upside.
0%
4%
Commodity prices have risen over the past month, and
could lead to a pickup in dairy prices, which should be
Employment, %
y/y, left supportive of the NZ dollar given it is a key export for the
Jobless Rate, right
-3% 3% New Zealand economy.
Given that the New Zealand government has largely been
Source: Datastream, Wells Fargo Securities able to contain the spread of the second wave of COIVD,
Data Mixed, but COVID Appears to be Contained allowing domestic restrictions to be removed, the
government may start to consider opening its borders to
The New Zealand government appears to have largely
Australia. Both countries are in close proximity and
contained the second wave of COVID cases in Auckland,
Australia has already re-opened its borders to allow New
allowing the government to lift the lockdown measures.
Zealanders into the NSW state and the Northern Territory
However, the NZ border remains closed, which will likely
without having to quarantine. Therefore, if the
weigh on activity given tourism’s significance for the NZ
government views it safe to open its borders, it would
economy, and as a source of export revenues.
likely benefit the country’s tourism sector.
Data released this month was mixed. Employment fell
0.8% q/q in Q3, but was 0.2% higher than a year prior. Central Bank Outlook
Meanwhile, the unemployment rate spiked to 5.3%, the Official Cash Rate forecast
highest since 2016 and hours worked jumped 9.4% q/q,
Current: 0.25% 3M 6M 12M
after a sharp fall in Q2. New Zealand inflation
unexpectedly eased in the third quarter, with the headline Wells Fargo 0.25% 0.25% 0.25%
CPI slowing to 1.4% y/y. The below forecast inflation read Market Implied 0.23% 0.10% 0.05%
should add some support for further monetary easing to Source: Bloomberg LP, Wells Fargo Securities
come. At its November policy meeting, the Reserve Bank of New
Leading indicators slowed in October. The manufacturing Zealand (RBNZ) held its Official Cash Rate (OCR) steady
PMI fell to 51.7, but still remained in expansion territory, at 0.25% and maintained the size of its Large Scale Asset
while new orders eased to 52.4. Meanwhile, confidence Purchase program at NZ$100B. However, the committee
indicators have been mixed. Consumer confidence provided additional monetary stimulus through a
jumped to an eight-month high in October, rising to 108.7, Funding for Lending Program (FLP), which will be
but still below its 2019 average of 120. For the monthly implemented in December. The FLP is expected to work
business confidence survey, November headline business primarily by lowering funding costs and boosting credit
confidence was little changed at -15.6, while businesses’ availability to support economic activity and employment.
monthly activity outlook figures edged slightly lower to In the accompanying statement, the central bank noted
4.6. Separately, October retail card spending rose 8.8% economic activity has proved more resilient than
m/m and September credit card spending rose 1% m/m. previously expected, and now looks for the NZ economy to
PM Ardern Wins Re-Election in NZ fall 4% in 2020, compared to a 5.8% decline previously.
In a historic election win, New Zealand Prime Minister With FLP, we believe the RBNZ is less likely to utilize
Jacinda Ardern said she will use her mandate to aid and negative interest rates to provide additional stimulus. As
a result, we now look for the OCR to remain steady at
accelerate the country’s economic recovery.
0.25% over the foreseeable future, though the risks
remain tilted to further monetary easing in some form.
12WELLS FARGO SECURITIES
International Economic Outlook – November 2020 INTERNATIONAL ECONOMICS
Sweden/SEK Norway/NOK
Outlook Outlook
The Swedish krona has been resilient, despite a resurgence in Among the G10, the Norwegian krone has led gains in recent
Swedish COVID cases and the government imposing local weeks. Higher oil prices and improved market sentiment, as a
restrictions in several regions. However, given the recent result of positive news on the progress of a COVID vaccine has
positive news on the progress of a COVID vaccine and positive been supportive of the Norwegian currency. Following the
market sentiment, that could provide a boost to the Swedish recent boost, we also look for continued strengthening over the
krona in the near-term, and we continue to look for the medium to longer term, targeting and exchange rate of
currency to gain over time. EUR/NOK10.4000 by Q1-2022.
Fundamental Focus: Economics, Policy & FX Fundamental Focus: Economics, Policy & FX
70 Swedish Sentiment Surveys 125 Norway Inflation
% year/year
6%
60 110 5%
4%
50 95 3%
2%
40 80 1%
0%
30 65 CPI
-1%
Services PMI, left CPI-ATE
Manufacturing PMI, left -2%
Economic Confidence, right
20 50
-3%
Source: Bloomberg LP, Wells Fargo Securities Source: Bloomberg LP, Wells Fargo Securities
Swedish Government Imposes Local Restrictions Norges Bank Policy Rate Remains Steady
The resurgence of Swedish COVID cases prompted the The Norges Bank held its key rate unchanged at zero
Swedish government to impose local restrictions in percent at its November 5 policy meeting, and reiterated
several regions in addition to group limits in restaurants that the outlook for the policy rate would remain at the
and other social distancing advisories. Although the current level for “some time.” The central bank also
government has yet to impose lockdown measures, the acknowledged the prospect of increased COVID cases and
latest developments could put some pressure on the stricter restrictions poses a threat to Norwegian economic
Swedish economy in the fourth quarter. growth. Looking forward, we continue to look for the
Increase in COVID Cases Creates Downside Risk Norges bank to remain on hold for the foreseeable future.
The Swedish economy rebounded less than expected in Norway Sees Record GDP Rebound in Q3
Q3. The flash GDP estimate rose 4.3% q/q, recovering Activity in Norway appears to have started to recover in the
about half of the Q2 contraction, but the second wave of third quarter, although the second wave of COVID across
COVID is likely to weigh on Q4 growth. Retail sales Europe and proceeding lockdowns may slow the recovery.
rebounded in September, rising 0.8% m/m, while the The Norwegian government imposed several restrictions
labor market also showed some signs of improvement. such as group limits and a curfew on restaurants and bars.
The September unemployment rate edged lower to 9.0% On the data front, retail sales are considerably higher than
(sa), however, Q3 labor data indicated the unemployment prior to the COVID pandemic, however, September sales
rate increased 2.1 percentage points to 8.6% (nsa). rebounded less than expected, rising only 0.3% m/m.
Headline inflation slowed to 0.3% y/y in October. Other indicators have also showed signs of improvement
Leading indicators improved in October. The with the October manufacturing PMI rising more than
manufacturing PMI rose to 58.2, pushing further into expected to 53.4, while the unemployment rate edged
expansion territory. The increase in COVID cases appears lower to 3.5%. However, other figures still remained soft as
to have not yet had an effect on Swedish manufacturing Q3 industrial confidence increased to 1.7 but industrial
activity, but next month’s release may show some slowing. managers reported a further downturn in total production
The October services PMI edged slightly higher to 55.0. volume in the third quarter. Actual manufacturing output
Meanwhile confidence indicators also improved over the declined 0.5% m/m in September, and industrial
same time period, although less than expected. The production declined 1.7% m/m over the same month.
economic tendency survey rose nearly two points to 96.3, Meanwhile, core inflation edged higher in October, rising
as consumer confidence rose to 90 and manufacturing 3.4% y/y, well above the Norges Bank’s target of “close to
confidence rose to 106.8. 2%,” while headline inflation rose 1.7% y/y.
13WELLS FARGO SECURITIES
International Economic Outlook – November 2020 INTERNATIONAL ECONOMICS
Mexico/MXN
Outlook
Progress on a COVID vaccine and other treatments should keep sentiment towards emerging market currencies supported, with
the peso a likely beneficiary from improved sentiment. In addition, we believe the Central Bank of Mexico is done cutting policy
rates which should also support the peso. Longer term, an uninterrupted global economic recovery along with less trade
uncertainty hovering over the Mexican economy should also help the peso strengthen back to pre-pandemic levels in 2022.
Fundamental Focus: Economics, Policy & FX Economic & FX Risks
Mexico Real GDP Growth Upside Scenario
12% 16%
We forecast peso strength; however, the currency could
6% 8% outperform if a vaccine is approved and widely available
earlier than expected (Q1-2021). Should a vaccine and
0% 0% other effective treatments become available sooner than
anticipated, we expect broad emerging market currencies
-6% -8%
to rally, and the peso to participate in that upside.
% qtr/qtr, left A Biden-led White House lifts trade uncertainty over
-12% % year/year, right -16%
Mexico and leads to more cordial relations between the
-18% -24%
U.S. and Mexico. Another U.S. fiscal stimulus package
gets approved despite divided U.S. Congress, fueling gains
Source: Bloomberg LP, Wells Fargo Securities in emerging market FX.
Vaccine and Treatment Becoming Available? Mexico’s economy continues to recover, while CPI
inflation continues to rise, resulting in a more hawkish
While a renewed wave of COVID infections is making its
central bank.
way across the United States and Europe, we believe a
Should this scenario materialize, we look for USD/MXN
return to strict lockdown measures similar to what
to break below MXN20.00 and potentially below
occurred in March and April is unlikely.
MXN19.50 in early 2021.
It also appears progress towards a successful vaccine is
being made. Positive news on a vaccine and other Downside Scenario
treatments has sparked some improvement in markets, A second wave of infections occurs across major
which could persist through the end of the year. Against economies and widespread re-imposition of lockdown
this backdrop, the Mexican peso can strengthen further measures go into effect. Global activity slows and
especially if global equity markets continue their dampens risk sentiment toward emerging currencies,
improvement. while safe haven currencies such as the U.S. dollar rise as
Q3 GDP Beats Expectations investors turn more risk averse.
We have revised our 2020 GDP forecast higher as Q3 GDP A divided U.S. Congress cannot find a path to additional
data were better than expected. In Q3, Mexico’s economy fiscal stimulus and the U.S. economy falls back into
expanded 12% q/q, more than our forecast as well as recession. Given trade links with the U.S., Mexico’s
consensus expectations. We now expect the Mexican economy declines more severely and falls into a deep state
economy to contract 9.2% for full-year 2020. of recession.
In addition, the October manufacturing PMI rose to 43.6; While the likelihood of this scenario has increased, we still
however, gross fixed investment declined 17.4% y/y in view it as a tail-risk at this point. Should this scenario
August, a larger than expected fall but still an materialize, USD/MXN could test its weakest level
improvement from the July outcome. experienced back in March (MXN25.78).
Banxico Holds Rates Steady Central Bank Outlook
With inflation on the rise, we made an out of consensus Overnight Rate forecast
forecast for the Central Bank of Mexico to hold rates Current: 4.25% 3M 6M 12M
steady at its November meeting. That forecast came to
Wells Fargo 4.25% 4.25% 4.25%
fruition as Banxico kept rates at 4.25%.
Market Implied 4.23% 4.19% 4.23%
Our interpretation of the accompanying statement is rate
cuts won’t occur until inflation consistently falls below Source: Bloomberg LP, Wells Fargo Securities
4%. In our view, we think inflation will stay somewhat
elevated and keep the central bank on hold going forward,
which should also support the peso.
14WELLS FARGO SECURITIES
International Economic Outlook – November 2020 INTERNATIONAL ECONOMICS
China/CNY & CNH
Outlook
Given our view that market participants will focus on underlying economic fundamentals, we maintain a positive outlook on
the Chinese renminbi. In addition to a strong economic recovery, a Joe-Biden led administration in the United States could
result in a less contentious relationship between the U.S. and China, which could result in further renminbi strength. We expect
China and renminbi denominated assets to continue to attract capital flows, further supporting the Chinese currency.
Fundamental Focus: Economics, Policy & FX Economic & FX Risks
Chinese Economic Growth Upside Scenario
18% % year/year
A COVID vaccine is distributed and widely available in
early 2021 leading to a risk rally and investors seeking
12%
exposure to emerging market assets.
Chinese authorities allow further access to local assets,
6%
and capital flows to China and renminbi denominated
assets strengthen significantly.
0%
A Biden-led White House takes a more conciliatory
GDP
Secondary Sector approach to trade with China. Tariffs under the Trump
-6%
Tertiary Sector administration are rolled back and a commitment to the
Primary Sector
existing Phase I deal by the U.S. and China is made.
-12%
In this scenario, we would expect CNY/CNH to fall below
CNY/CNH6.50, a level not seen since mid-2018 when
Source: Bloomberg LP, Wells Fargo Securities
President Trump first applied tariffs to select Chinese
China’s Economy Humming Right Along exports, more quickly than we currently forecast.
In our view, China continues to lead the global economic
Downside Scenario
recovery and is keeping COVID contained. Q3 economic
data confirms China’s recovery remains intact as GDP Another wave of infections hits Beijing and other major
expanded 4.9% y/y, slightly below our forecast, but cities in China resulting in manufacturing plants shutting
encouraging nonetheless. down and lockdown measures going back into place. Local
The strong recovery and sound underlying economic economic activity grinds to a sudden halt.
fundamentals have attracted capital flows back to China. The recovery in China is disrupted and Q1-2021 GDP
Given our view market participants will focus on contracts similar to Q1-2020. Sentiment towards
fundamentals and local developments, we believe the emerging market countries sours and capital flight across
renminbi can continue to strengthen as the local recovery China and the emerging markets spectrum ensues.
remains uninterrupted going forward. Capital outflows sees the Peoples Bank of China to devalue
U.S. Election Result Could Benefit China the renminbi and a sharp selloff in the currency ensues.
CNY/CNH weakens towards the psychologically
Leading up to the U.S. election, the path of the Chinese
important CNY/CNH7.00 level.
renminbi was little affected by rhetoric or action from the
Trump administration. Now that Joe Biden will assume Currency and Capital Flows
the White House, it is possible relations between the U.S.
USD/CNY & USD/CNH Exchange Rates
and China become less hostile. USD/CNH USD/CNY
7.20
That is not to say a Biden-led administration would not
pursue a “hard line” approach to China and take action on 7.10
issues such as forced intellectual property transfer; 7.00
however, trade policy, such as a rollback of Trump
administration tariffs and a further commitment to the 6.90
Phase I trade deal, could become friendlier. 6.80
We expect a less contentious relationship between the two
6.70
countries, ultimately taking pressure off China’s local
financial markets, currency and economy. These 6.60
dynamics should help the renminbi strengthen over time
6.50
and attract additional capital flows, especially as Chinese
authorities make local assets and the currency more Source: Bloomberg LP, Wells Fargo Securities
accessible to foreign investors.
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