International economics: 2022 outlook

Summary

Forecast Changes

• We have turned more optimistic on the prospects for the U.S. dollar and adjusted our forecasts to now reflect dollar strength throughout 2022 and into 2023. A hawkish Federal Reserve should provide support to the dollar going forward, while we believe financial markets may still be priced for too much monetary tightening from several foreign central banks.
• In our view, renewed and persistent U.S. dollar strength should keep most G10 currencies weaker through early 2023. We have revised our forecasts for most G10 currencies lower, including the Canadian dollar, British pound and the euro.
• 2022 is likely to be a challenging year for emerging market currencies. Tighter Fed monetary policy should keep downward pressure on most emerging currencies, while political risks should also be a source of depreciation pressure. In particular, political risk should weigh on the Brazilian real, and Chilean and Colombian pesos, while an unorthodox policy framework should result in a significantly weaker Turkish lira for the foreseeable future.

Key Themes

• As we head into 2022, we believe the evolution of COVID could continue to have an important influence over the path of the global economy as well as currency markets. The Omicron variant has yet to reveal its full economic impact and introduces new downside risks to global economic activity. Research on Omicron is still limited; however, should Omicron become the new Delta, the global economic recovery could be disrupted by COVID developments next year. Persistent inflation pressures should also be a significant influence in 2022, posing some downside risk to growth as it weighs on consumer purchasing power and prompts central banks to tighten monetary policy.
• China's economy came under pressure for most of 2021 amid the government's commitment to COVID-related policies as well as protecting the economy from perceived systemic risks. While risks to China's economy are likely to persist in 2022, we expect the economy to be supported by a shift to more accommodative policy settings. As China's economy stabilizes, the global economy as well as China-dependent economies should find a pillar of support.
• The political calendar in 2022 is quite heavy, as the United States will host midterm elections. We expect China policy to play a major role in U.S. midterms and for U.S.-China tensions to escalate over the course of next year. Local political developments in China could also be a source of stress, as China's 20th National Congress is likely to result in President Xi breaking tradition and staying in power. Brazil and Colombia will also head to the polls, where we expect developments to weigh on each respective currency, while a contentious constitutional rewrite process should keep depreciation pressure on the Chilean peso going forward.

Download the full report