2021 - clearer opportunities or lots of risks

The year 2020 was a year of extremes for financial markets. Nevertheless, one could say that most of the assets have dealt with the pandemic relatively well and investors are not too nervous at the beginning of the year. In general, the world is expected to gradually return to normal, which could help sectors or currencies that have been under pressure.

Dolar is losing everywhere

Probably the biggest underdog of the pandemic will be the US dollar, which might sound weird at first because it is the number one reserve currency and a safe haven where investors take refuge in times similar to the current pandemic. And for quite some time, the dollar really was a safe haven. This led to the dollar rising to its highest level in months. Eventually, however, the dollar rally ended, and so did investors' fears of a long-running recession. The central banks came up with an unprecedented response and assured almost every investor that there was nothing they would not try to solve by lowering rates or reprinting money. 

Today, the dollar is at its lowest level in two years, and this year it is likely to continue in a similar manner. We can expect further weakening. However, this gives room for growth for currencies that have not yet recovered so much. From the dollar's point of view, the expectation of a further decline in risk is thus clearer for planning opportunities in other markets, such as gold or the currencies of emerging economies.

What could go wrong? 

The main risk in 2021 is undoubtedly inflation. But apart from inflation itself, we should also pay attention to interest rates. They would have to go up in an environment of faster inflation and the markets, companies and the economies themselves are not ready for it. During the pandemic, the number of "zombie companies" that make no profit, but can continue to operate due to extremely low borrowing costs and central bank policy, has risen. And the same goes for the individual asset classes, whose valuations have been taken to extremes during the pandemic. 

Once there will be no place for stocks to grow, a “hunt for returns” will begin among investors and cheap US dollars will start seeking their place in countries that are significantly riskier. Once again, we are speaking about the risk of higher interest rates, which can make investments quite expensive if the economy does not recover according to plan.

Thanks to the "blue wave" in the US, the Fed has received a contingency plan, which consists mainly of higher government spending. However, the markets still underestimate the potential of the democratic party and especially the risk of higher corporate taxes and regulations, which will not be good news for the markets in the long run, as well as for US debt, which will continue to grow and put pressure on the US dollar and support US government bond yields. This would be an unsustainable situation in the long run, which can lead to inflation.

However, the fall of the dollar is not the only event that moved the markets last year and will affect this year as well. Rising gold prices, the collapse of the oil market, and hopes for the Czech koruna are also the key events that should not be left behind. If you want to gain deeper insight into this problematics, be sure to read our newest ebook Trading opportunities for 2021.

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