FX.co ★ Most banks forecast market rally in 2021. Outlook for USD, CAD, and JPY

On the first trading day of the new year, markets saw a rally of gold, oil, and stock indices. At least, countries of the Asia-Pacific region and Europe are overwhelmed with optimism. Growth of both gold and petroleum prices in parallel has always indicated the same consequence, i.e. protracted weakness of the US dollar.

A number of large banks, including Nordea and Mizuho, unveiled their forecasts for 2021 at the end of the last year. They all share the same viewpoint. The year of the Bull according to China's calendar opens the bullish prospects for financial markets. There are some minor differences in forecasts, but the common point is the prediction of the robust economic recovery which is likely to kick off in Q2 2021. Why the second quarter? Apparently, the first three months of 2021 will be devoted to the battle against COVID-19. The mass vaccination campaign, which has been already underway in many countries, will bear the first fruits. No doubt, the virus is especially contagious in the winter season.

The most important political event in the US which could sharply change market sentiment is the election to the Senate from the state of Georgia that is slated for January 5. If Democrats manage to win both seats from Republicans, this will ensure the 50-50 equality in the Senate. This balance will be disrupted by the decisive vote by new Vice President Kamala Harris. Markets reckon that the odds are against the scenario that both Democratic nominees will be elected to the Senate. On the other hand, Donald Trump ruined the relations with Georgia's Republican Governor Brian Kemp in such a degree that the state voted for the Democratic President for the first time in many years.

To sum up, the markets will be trading under moderate volatility in the first days of the new year. The US dollar remains under pressure. Market participants are poised to focus on positive news and a further economic recovery.

USD/CAD

In widely expected move, USD/CAD hit a fresh low. The Canadian dollar asserts strength as investors are shifting focus towards commodity currencies and emerging markets currencies. They foresee nice investment opportunities in risky assets.

The latest update for the futures market available at the moment shows a sharp rise in demand for the Canadian dollar. The weekly change in contracts is 2.019 billion that is the highest increase among G10 currencies. The forex rate of USD/CAD is nearly the same as the rate in the spot market. It could indicate that the bearish momentum is stalling but the overall trend for the currency pair is still downward.

Bearing in mind a strong correlation between the Canadian dollar and the US stock market, the USD/CAD pair is expected to hit new lows in the early American session because futures on the S&P500 index suggest a bullish start of the session. So, USD/CAD is likely to trade with the bearish bias. The target of 1.25 could be reached in the nearest days.

USD/JPY

The Japanese yen has been stuck in the bullish for five years straight. The yen opened in 2015 at 125 against the US dollar, the comfortable level for exporters. As the USD/JPY pair is approaching the psychological level of 100, Japan's government is getting more determined to prevent the national currency to be trapped below this level. As soon as new Prime Minister Yoshihide Suga had taken office, he ordered the finance ministry to keep close tabs on the yen's dynamic and make every effort to cap the yen's plunge below 100.

This scenario will entail consequence for the Bank of Japan's monetary policy. Indeed, a further rate cut will not guarantee that the yen will halt its further strengthening. The stronger yen will inevitably do more harm to the domestic economy.

As a result, analysts share the idea that Japan's government will venture into forex interventions if the market endeavors to push the yen further downwards.

What is obvious is that analysts have a more uncertain outlook for the yen than for the rest of G10 currencies. USD/JPY is expected to trade at about 107 in the medium term. However, the downward move is going to be temporary due to speculative reasons. In other words, the yen's strength does not rest on fundamental reasons.

Meanwhile, USD/JPY is stalling its decline. It means that the market is serious about the scenario of forex interventions. So, traders prefer to close short positions on USD/JPY. Another factor to bear in mind is that the massive vaccination campaign dampens anti-risk sentiment, thus reducing demand for safe haven assets.

Analysts do not rule out attempts to move below 102.70. If so, the odds are that the currency pair will enter the stage of a correctional growth. USD/JPY is likely to rebound to a local high of 103.90 and enter a range-bound market.