Market forecast for next year (Deutsche Bank)

Slowly but surely we are moving towards the end of the trading year. Before we can say that we still have a full quarter left, in the trading world it is the shortest quarter of all. 

The issue is the month of December and the end of the year positioning. From the second half of November, liquidity starts to dry up. In December, the major institutional traders are already thinking about the following year. In some cases, internal regulations oblige them to close their positions before the end of the year - or even earlier.

In other words, we are faced with at least two months of decent liquidity. These two months will be heavily influenced by the Trump/Biden election.

In a recent report, Deutsche Bank sets out its views for the rest of the trading year. As it runs one of the largest research departments in the world, it is interesting to take a look at what it has to say.

Crude Oil
Deutsche sees the price of crude oil have a slight upward bias towards the end of 2020. The underlying argument is that stocks are likely to decline as demand picks up. Moreover, the modest but steady recovery in oil prices is expected to continue into next year.

Monetary policy
The ECB is supposed to relax in December, but not this month, as many believe after this week's data on inflation in Germany, France and Italy. If we put the data together and try to anticipate the impact on tomorrow's HICP, core inflation could come down even further, perhaps to +0.19% or less.

The ECB is likely to instead relax this month instead of waiting until December, but it could take advantage of this month's meeting to warm up the markets and send a dovish signal.

Surprisingly, the Deutsche Bank is expecting further easing from the Bank of England next month. This time, the BoE is seen as adding another £59 billion next month to its quantitative easing programme. It is interesting to note that this may only be a step towards negative rates - a step that should only be taken in the event of a difficult Brexit.

Finally, Deutsche Bank estimates that the eurodollar exchange rate will be 1.20 at the end of this year, 1.25 at the end of next year and 1.30 at the end of 2022. Something has to change on both sides of the Atlantic for the EURUSD to evolve at this point without responding to the ECB's dovish comment.

Could this be the result of the forthcoming US elections?