After surging about 25% since the summer of 2021, the dollar fell sharply in November. For 2023, the question is whether this is the start of a new downtrend or whether the factors that pushed the dollar to those highs still have a say.” In general, however, the currency markets “will see fewer trends and more volatility in 2023 because the conditions do not seem to exist for a net trend of the dollar, furthermore the tightening of financial conditions by central banks, through the increase in rates and the reduction of balance sheets will only exacerbate the liquidity problems already present on the financial markets: volatility will remain high”. These are the key elements for ING’s currency analysts, in view of 2023, in the words of Francesco Pesole, FX strategist of the Dutch bank.
Tracing the euro-dollar exchange rate
According to Pesole, the factors for outlining next year’s currency scenarios will be the Fed’s aggressiveness in raising rates, Ukraine, Europe and the energy crisis, China and the global market risk climate. “Considering ING’s estimates that the Fed will cut rates to 5% in early 2023, there will be four quarters of recession in Germany as energy prices rise, Chinese growth will be relatively weak and the equity backdrop still difficult, our basic hypothesis leans towards lower euro/dollar levels”, which “could end the year close to parity”.
If the positive correlation between bonds and stock markets were to break next year, Pesole added, “it is likely to happen through a bond market rally.” ING believes that weakening global activity and growth in trade volume, which the bank expects to be below 2% “will likely limit gains in pro-cyclical currencies in 2023”. “The euro/dollar pair will set the pace for broader European currencies,” said the ING FX strategist, “we expect the Swiss franc to outperform and the pound to underperform… Further east, we see an opportunity to positively revalue the Hungarian forint, while the overvalued Czech koruna and the Romanian leu appear more vulnerable as currency interventions slow down.
Currencies, a look at Asia
In the block of “commodity currencies”, those most dependent on the performance of raw materials, the uncertain economic scenario in China continues to cast a question mark on the future performance of the Australian and New Zealand dollars. On the other hand, the uncertainties about the correction of the real estate market hang over the Canadian dollar, whose outlook is slightly more favourable. As for the relationship between the dollar and the major eastern currencies, ING believes that the dollar/yuan could struggle to sustain a move below 7.00, while the dollar/Japanese yen pair could end 2023 at 130 o less, considering a forecast on the 10-year Treasury yield of 2.75%. The outlook for the South Korean won is also positive, which should benefit from the inclusion of national debt in global government bond benchmarks.
Pound: should it be bought now?
So, is it time to bet on the pound? Analysts are optimistic, but do not fail to recommend a certain caution. Deutsche Bank highlights how Britain has managed to dodge a recession and the fiscal picture has drastically improved largely thanks to the sharp drop in gas prices. However, the bank points out that the UK remains the only major G-7 economy that has not yet recovered to its pre-pandemic level of output.
At the beginning of the year, analysts at Deutsche Bank had forecast a level of 1.25 for the GBP USD pair and the prediction has been respected. But now “most of the good news from the UK is embedded in the price,” they note. “The currency’s movement over the past month looks a bit exaggerated relative to the performance of relative rates, on top of that the market is still pricing in another BoE hike at the May meeting, but our base case is for a suspension,” said Shreyas Gopal, a strategist at Deutsche Bank.
However, the real rate differential could be a medium-term bullish driver for the cross, according to the expert. “This time last year, this spread was 100 basis points worse for GBP, but Cable was around 1.30, and if the remaining premium comes more from the USD side of the equation, Sterling looks well positioned to be among the relative winners in a dollar downturn if private sector leverage is the key differentiator over the rest of the cycle,” Gopal said.
Ray Attrill, head of FX strategy within National Australia Bank’s Fixed Income, Currencies and Commodities division, notes that the US dollar’s traditional role as a safe-haven asset has faded. “The greenback has been massively overvalued and the pound is among the most undervalued currencies,” he said. For this reason, the strategist sees His Majesty’s currency in the ideal position to benefit from the large dollar correction, although much of the positive news has already been discounted in the recent leap of the Cable from 1.19 to 1.25 in a short time .
Less optimistic is Valentin Marinov, head of G-10 FX research at Credit Agricole CIB. The expert points to the fact that Britain’s macroeconomic data has been surprisingly resilient but the economic outlook is not yet that great even in relative terms. “It certainly helps that other economies like the US have seen their outlook deteriorate quite rapidly, so that’s helping the pound, but I wouldn’t think the pound is a strong buy conviction solely based on domestic fundamentals,” he said. . Marinov also notes how in the 1980s recessions the British currency was among the underperformers in the early stages; thus it may not be the safest solution with global growth concerns.
