Apr Performance: -12.71%
We continue trading in very choppy waters. The U.S. dollar rose to its highest level in close to two years. Personally, I see inflation, interest rates and geopolitics as the biggest movers of currency exchange rates for the rest of the year but I'm confident that the dollar will hold onto its strength.
With all the economic uncertainty brought on during the pandemic, the Federal Reserve slashed interest rates down, keeping them close to zero. Two years later, U.S. inflation is at its highest level since 1982, and oil is reaching numbers not seen since 2008. Markets are now bracing for an aggressive series of interest rate hikes from the Fed. The hope is that higher borrowing costs will curb investments by consumers and businesses, as well as encourage saving, and that will pull inflation back down to more manageable levels.
U.S. government officials fear that Russia's invasion of Ukraine has no clear end in sight and could even last for years. Additionally, COVID cases forcing lockdowns in China’s industrial hubs are exacerbating many of the supply chain issues and economic headwinds. All this uncertainty is fueling the U.S. dollar, whether as a global reserve asset, a safe haven or simply a good investment.
The euro weakness is primarily attributed to policy differentials between the European Central Bank (ECB) and the Fed. ECB governing council member Martin Kazaks said the central bank could raise rates as soon as July amid “significant” inflation risks. Analysts are anticipating that the economies of the European Union will continue to face considerable downside risks as the conflict in Ukraine continues. A Bloomberg survey of 75 banks’ currency predictions shows 1.13 as the median EUR/USD rate at the end of 2022, with the highest prediction by an analyst calling for 1.20 in 2022.
The Canadian dollar recently had its best winning streak since January 2019. The loonie is benefiting from higher oil prices and Canada’s fastest increase in inflation since January 1991. Analysts are anticipating a minimum 50-basis point interest increase at the Bank of Canada’s (BOC) next meeting in June. BOC Governor Tiff Macklem commented that the central bank will be “as forceful as needed” in bringing down inflation. A Bloomberg survey of 75 banks’ currency predictions shows 1.25 as the median USD/CAD rate at the end of 2022, with the lowest prediction by an analyst calling for 1.16 in 2022.
The British pound dipped below 1.29 for the first time since November 2020 when the U.K. was in full COVID lockdown. Recent economic data revealed consumer confidence fell to its lowest level since the 2008 recession. The data has caused analysts to become more cautious of their interest rate hike predictions for the U.K. This comes as traders are increasing bets the Fed will have to act more aggressively, widening the expected interest rate differential between the two countries. A Bloomberg survey of 75 banks’ currency predictions shows 1.34 as the median GBP/USD rate at the end of 2022, with the highest prediction by an analyst calling for 1.40 in 2022.
The Japanese yen remains around its weakest levels in 20 years, nearing the psychologically important 130 threshold. The Bank of Japan’s (BOJ) commitment to “yield curve control”, in which it keeps interest rates anchored near zero, stands in sharp contrast with the Fed and other central banks. However, BOJ board member Goushi Kataoka said that the impact of a weaker yen is overall positive. Analysts expect the weakness to continue. A Bloomberg survey of 75 banks’ currency predictions shows 120.00 as the median USD/JPY rate at the end of 2022, with the lowest prediction by an analyst calling for 108.00 in 2022.
The Mexican peso reached its strongest level against the U.S. dollar since June 2021 and continues to move wildly. High oil and commodity prices as well as inflation have benefited the peso. Meanwhile, Mexico’s economy itself remains in trouble, ironically due to those same issues. The country fell into a recession in the second half of 2021 and analysts think monetary tightening will not help the outlook. A Bloomberg survey of 75 banks’ currency predictions shows 20.63 as the median USD/MXN rate at the end of 2022, with the lowest prediction by an analyst calling for 19.20 in 2022.
The Chinese yuan posted its biggest weekly loss since the surprise devaluation in 2015. Investor’s outlook toward China’s assets has turned south as the country’s COVID-zero strategy slows economic growth and analysts feel monetary policy support of late has been somewhat underwhelming; Chinese President Xi continues to defend the country’s COVID policy. Analysts think that, should the yuan continue to depreciate, the spill-over effects in the currency markets will be significant. A Bloomberg survey of 75 banks’ currency predictions shows 6.45 as the median USD/CNY rate at the end of 2022, with the lowest prediction by an analyst calling for 6.15 in 2022.
Rest assured we continue to look for opportunities whilst keeping risk to a minimum, it's going to be a very interesting few months ahead.