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Revising down our forecasts for riskier currencies

  • With the outlook for the global economy worsening further and the Fed still on the war path, we have revised down our forecasts for many G10 “high-beta” currencies and several EM currencies.
  • The US dollar has appreciated almost across the board this year, rising by ~6% in trade-weighted terms since the start of 2022. Until relatively recently, however, the greenback’s strength appeared mainly down to interest rate differentials shifting in favour of the US as the Fed ratcheted up its monetary tightening and the terms of trade shock from higher energy prices. The worst-performing currencies were those of economies with relatively dovish central banks and which import most of their energy, while those of commodity producers generally held up well despite worsening risk sentiment.
  • But over the past few weeks, as the sell-off across “risky” assets has intensified, that pattern has started to shift. The yen and the Swiss franc have held up the best against the dollar, while riskier currencies have fared the worst. Commodity exporters in particular have started to struggle as the prices of raw materials have fallen back a bit, and the currencies most exposed to the global economic cycle have been among the worst performers.
  • These developments have prompted us to reassess our forecasts. Broadly speaking, our forecast for the US dollar to strengthen against most currencies this year has proven correct, although many currencies have weakened by even more than we had anticipated. That said, our view had been that the patterns we saw in Q1 this year (which in many ways continued the key currency trends of 2021) would persist. In other words, we thought the increasingly aggressive global monetary tightening cycle would favour the currencies of economies whose central banks were tightening fastest, while the improvement in terms of trade would help the currencies of commodity exporters even if prices dropped back a bit – after all, those currencies have generally not reflected fully the rise in commodity prices since mid-2020.
  • However, this relative story has not played out over the past couple of months. With the risks to the outlook for the global economy increasing, we now expect risky assets generally to fall further and sentiment to remain weak for some time. We also expect most commodity prices to drop back a bit more this year, and to fall in 2023 and 2024 as well. In that environment, we think most currencies will weaken further against the dollar. Our forecasts for the next 6-12 months have changed in two key ways (see Table 1):
  • First, we expect the “high-beta” G10 currencies will weaken further as risk sentiment remains under pressure and commodity prices drop further. We also think that central banks in Australia, New Zealand, Canada, Norway, and Sweden will not raise interest rates as far as money markets now appear to discount. Indeed, because housing markets in these economies look extended and household debt is both at very high levels and sensitive to higher interest rates, we expect central banks in Canada, Australia, and New Zealand to be among the first to cut policy rates. Combined with our forecast for commodity prices to fall, this suggests to us that the loonie, aussie, and kiwi will remain among the worst performers this year and next.
  • Second, we think that most Asian currencies will continue to depreciate. Economies in the region are particularly sensitive to the global economic cycle, especially to the strength of China’s economy. Because we expect only a limited economic rebound in China, and further deprecation of the renminbi, we think other Asian currencies will remain under pressure for some time yet. In addition, we expect many central banks in the region to remain relatively slow to tighten monetary policy, weighing on their currencies.
  • We have also revised down our forecasts for some other EM currencies but, aside from the Turkish lira, we do not anticipate large falls. Many of these currencies have already lost a lot of ground over the past couple of years and, in our view, have limited scope to fall much further unless there is a major market meltdown.
  • We have not revised our forecasts for the euro, yen, and the renminbi (and we have actually pushed up our forecast for the Swiss franc on account of the SNB’s apparent intention to combat inflation with a stronger currency). Although we think these currencies will also continue to weaken against the US dollar, we expect them to hold up better relative to riskier currencies than we had previously anticipated.
  • We continue to anticipate that the US dollar will peak in the first half of next year, once the Fed’s tightening cycle culminates, the global economy starts to turn the corner, and inflation strains begin to ease. That said, we think the risks remain tilted towards even greater, and more sustained, dollar appreciation. If the global environment worsened more than we anticipate, the dollar could well rise by another 10% or so on average, and by more against the most risk-sensitive currencies. In such an environment, other safe havens such as the yen and the franc would probably rebound significantly.

Table 1: CE End-year Forecasts

G10

Current*

2022

2023

2024

Key Crosses

Current*

2022

2023

2024

EUR/USD

1.05

1.00

1.10

1.15

DXY

104.21

109.43

101.23

101.23

USD/JPY

135

140

130

120

EUR/JPY

142.3

140.0

143.0

143.0

GBP/USD

1.23

1.18

1.25

1.35

EUR/GBP

0.86

0.85

0.88

0.88

USD/CHF

0.96

1.00

0.91

0.87

EUR/CHF

1.01

1.00

1.00

1.00

USD/CAD

1.30

1.35

1.40

1.40

EUR/SEK

10.69

11.00

10.50

10.50

AUD/USD

0.69

0.66

0.64

0.64

EUR/NOK

10.43

11.00

10.75

10.75

NZD/USD

0.63

0.60

0.58

0.58

NOK/SEK

1.02

1.00

0.98

0.98

USD/SEK

10.15

11.00

9.55

8.91

AUD/NZD

1.10

1.10

1.10

1.10

USD/NOK

9.90

11.00

9.77

9.13

AUD/JPY

93.3

92.4

83.2

83.2

EM Asia

USD/CNY

6.70

7.00

7.00

7.00

EUR/CNY

7.06

7.00

7.70

7.70

USD/KRW

1296

1350

1300

1250

CNY/JPY

20.18

20.00

18.57

18.57

USD/TWD

29.7

31.0

29.5

29.0

EUR/KRW

1365

1350

1430

1430

USD/INR

78.3

80.0

78.0

78.0

JPY/KRW

9.59

9.64

10.00

10.00

USD/MYR

4.40

4.50

4.30

4.20

CNY/KRW

194

193

186

186

USD/IDR

14845

15500

16000

16000

USD/THB

35.5

36.0

34.0

32.0

USD/SGD

1.39

1.34

1.33

1.31

USD/PHP

54.9

58.0

60.0

60.0

EMEA

USD/ZAR

15.92

17.00

17.50

17.50

EUR/ZAR

16.77

17.00

19.25

19.25

USD/TRY

17.36

24.00

24.00

20.00

EUR/TRY

18.30

24.00

26.40

26.40

USD/RUB

53.3

60.0

65.0

70.0

EUR//RUB

56.1

60.0

71.5

71.5

USD/ILS

3.44

3.50

3.30

3.10

EUR/ISL

3.62

3.50

3.63

3.63

USD/PLN

4.47

4.80

4.18

3.91

EUR/PLN

4.71

4.80

4.60

4.60

USD/CZK

23.5

25.5

22.7

21.3

EUR/CZK

24.7

25.5

25.0

25.0

USD/HUF

380

400

355

339

EUR/HUF

401

400

390

390

USD/RON

4.69

5.15

4.73

4.52

EUR/RON

4.94

5.15

5.20

5.20

LatAm

USD/BRL

5.24

5.30

5.50

5.50

USD/MXN

19.96

21.50

20.50

20.00

USD/COP

4096

4200

4300

4300

USD/CLP

904

925

875

850

USD/PEN

3.75

3.90

3.80

3.80

Sources: Refinitiv, CE, *As of 24th June 2022


Jonas Goltermann, Senior Markets Economist, Jonas.goltermann@capitaleconomics.com