Our trade recommendations are outlined in FX Markets Weekly (see: 2020 Post-Mortem on page 37). This section highlights strategic trades for the substantive global macro issues that we expect to play out at least through the first few months of the year, if not the whole of 2021. If the pandemic has taught us anything, it is to be humble about our ability to see beyond the prevailing paradigm.

1. A global reset but a slower reboot. Reflationary conditions are set fair as the broader range of viable vaccines offers reassurance that the near-term dip in activity will be followed by a sharp rebound from the spring. While the global recovery should contribute to further USD losses, these will be less broadly-based (USD-correlations typically weaken after the initial Vshaped pivot) and less substantive than in recent months. This is especially so vs. DM, where rate compression has run its course, and could even reverse if 5-6% US growth in 2H sets up a mini-taper tantrum. The Fed’s new regime has flattened but not totally eliminated the USD-smile. USD shorts are best confined to EM pairs with either a structural edge (CNY, which should also be the main beneficiary of a re-set in US trade policy) or an excessive risk premium (RUB). USD/JPY is our solitary USD-short within G10.

NOK is now the high-beta currency of G10; we recommend longs vs. EUR.

2. FX in a world devoid of rate differentials. Surplus currencies triumphed in 2020 as the elimination of rate spreads increased the relevance of commercial flows. This low-for-much-longer environment favours further (low-vol) appreciation of surplus FX in 2021, especially the handful in EM that offer high-yield and a surplus (CNY, RUB). JPY is our preferred surplus currency in G10 – the Japanification of G10 bonds renders obsolete the structural capital outflow rationale for ultra-cheap JPY valuation. We recommend short USD/JPY on this structural yield compression. Shorts in AUD/JPY or NZD/JPY are also viable expressions of the theme – almost zero carry now - albeit probably best considered

only once the initial wave of vaccine-enthusiasm in risk markets has settled down. The record-low yield on highbeta G10 currencies also makes them attractive fundingvehicles for EM longs, enabling investors to partly hedge the beta to growth at a minimal yield give-up vs USD funding. We recommend long CNY vs AUD on this basis; long RUB/NOK is also worth flagging.