RISK MANAGEMENT | 20 APRIL 2021

2021: Cautious
Optimism for FX

Chris-Pazsis-Profile

Chris Paizis

Corporate FX and International Banking

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As the global economy moves towards the middle of 2021, it’s worth pausing to reflect on what the future looked like a year ago. With its hard lockdowns, global economic collapse and anxiety around the COVID-19 pandemic, 2020 was a year marked by fear and uncertainty. What has changed in 2021, and what does that mean for FX?

Fear and optimism

“2020 was a year of cautious fear,” says Chris Paizis, Head of Corporate FX and International Banking at Absa Group. “We were fearful that we were in the midst of an enormous crisis, and markets tried to be cautious by avoiding panic. Central banks really came to the party in 2020, putting a lot of liquidity into the markets, and there was support for various businesses globally. So yes, it was not great – and industries like hospitality and travel were hit really hard – but overall, 2020 was not as bad as it could have been.”

The result was a very different outlook for this year. “2021 is a year of cautious optimism,” Paizis says. “In terms of growth and resilience, we’ve done better than expected across many industries in the first quarter. That translates into a different year for FX.”

While 2020 saw massive currency volatility, the reduced trade activity meant that those flows were not in imports and exports. Instead, they were within financial institutions, as investors rebalanced portfolios and took advantage of the crisis. Are we going to see the same kinds of volumes in the same sectors in 2021? Probably not, says Paizis. “We’ve already seen an increase in imports and exports in general, which means that trade flows have picked up to a sustainably higher level of activity,” he says. “We’re seeing that reflected in the FX market.”

Positive outlook for emerging markets

Another key difference between 2020 and 2021 is that there is no US presidential election this year. “2021 marks the start of the post-Trump era, which means a very different world for emerging markets,” Paizis says. “There’s more risk appetite, so emerging market currencies are likely to see more strength than they did in 2020, and that obviously presents opportunities for clients in an emerging market like South Africa. We’re already seeing a resilient rand currency, strengthened on the back of greater risk-on sentiment.”

The global COVID-19 vaccine rollout is another significant difference. “On a macro level, very few experts expected the vaccines to come this quickly and to be this effective,” says Paizis. “Barring a few limited issues with some of the vaccines, this seems to be a very effective vaccination programme.”

Buoyed by that positive sentiment, South Africa’s core industries are doing well, with agri-exporters, amongst others, enjoying what Paizis describes as “a fantastic year”.

“Globally, the expectation is that 2021 will be a year of growth,” he says. “It won’t immediately take us back to where we were pre-COVID, but it will certainly be better than people expected in 2020. Then, 2022 might be the year that sees a return to normality – barring any global surprises.”

Connected for the new normal

If 2020 taught us anything, it’s that digital capabilities are key to navigating 2021’s market conditions. “The easier it is to do business from a mobile location, the more successful you’re going to be,” says Paizis. “That’s why Absa has launched services like mobile orders via its Absa Access FX platform, which is now integrated into the broader Absa Access to give clients a single sign-on for all their banking. We understand that you have to make the customer experience digitally enabled.”

Digital solutions like Absa Access are enabling businesses and individuals to operate in this strange “new normal”. And Paizis is confident that the global economy will continue to pick up through 2021. “We’re seeing more cautious optimism and more activity this year, as well as less concern about what tomorrow might bring and what volatility there might be in the currency,” he says. “The general perception is that we saw the worst of it last year.”

And what a year it was. “In March 2020 the feeling was that we were living in bunkers, and the Apocalypse was about to hit,” Paizis says. “But fast-forward to mid-2021 and a lot of that anxiety has gone. There’s a real sense that we’ve lived through it, we’ve seen what it’s all about and we know what to expect. Now everybody wants to go back to normal. That’s a good analogy for the FX market, too. The volatility we saw in 2020 was unprecedented in terms of the speed and magnitude of the moves in the currency. Yet the market reacted very maturely, and everyone came out of it.”

Compared with the gloom of 2020, then, Paizis is painting a picture of optimism for 2021, even if, after the shocks of last year, it’s a cautious optimism.

Chris-Pazsis-Profile
Chris Paizis

Head: Corporate FX and International Banking

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