We expect the dollar to stay strong, commodity currencies to remain in demand and investors to have to work hard to identify returns in emerging market FX.

Don’t mess with the dollar

Assuming that Omicron risks play out closer to the benign end of the spectrum, our team looks for the sharper Fed tightening cycle to return as a theme in early 2022. This should be good news for the dollar. Here the US economy’s positive output gap should mean that the Fed moves to the forefront in the G10 policy normalisation story in 2022 – and that the dollar plays its part in tightening US monetary conditions.

In a world where the European Swiss and Japanese central banks are late to tighten – or have the biggest cause to pause – dollar gains should largely come at the expense of the low-yielding currencies. Here EUR/USD can trade to 1.10 through the year and USD/JPY potentially as high as 120. Helping these trends will be European and Japanese investors reducing FX hedge ratios on US investments because of the high cost of dollar hedging, while US investors will happily increase FX hedge ratios on European and Japanese investments – being paid to do so.

Commodity currencies have more to offer

2021 has proved a mixed year for commodity currencies, but 2022 should be better. We think their current valuations do not fully reflect the terms of trade gains seen in 2021 and the positive income shock delivered to their economies. Here, strong profits particularly among the energy exporter community should lead to enduring business investment trends and provide local central banks, such as those in Canada and Norway, with the confidence to extend tightening cycles, perhaps by as much as 100bp in both countries in 2022.

In addition, Norway's krone has struggled to reclaim the liquidity-induced collapse in March 2020 and scores cheap on medium-term valuation models. The Canadian dollar has the benefit of the support from the strong US final demand story next year.   

Emerging market FX requires Alpha to be sought

Emerging market currency trading in 2021 proved that it was not simply enough to take a 'risk-on, risk-off' view of the world and trade the asset class accordingly. The Alpha, the excess returns over the benchmark index, were very much determined by local stories. The same should be true for 2022. One big theme for next year will be if and when Chinese authorities allow the very strong renminbi to correct lower. That could be a story in the second half should priorities shift from protecting importers to protecting exporters.

Elsewhere, emerging currency trends will be determined by themes such as the pandemic, central bank reaction functions and politics. There are big elections across many regions next year (Hungary and Brazil to name but two) and how policymakers handle inflation, growth and sovereign balance sheets will be very much in focus. Of the bigger emerging currencies, we would probably favour the Mexican peso, backed by strong US growth and a central bank looking to insert a near 6% policy rate buffer over the US.

Read the original analysis: Three FX calls for 2022

Content disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more here: https://think.ing.com/content-disclaimer/

Recommended Content


Recommended Content

Editors’ Picks

AUD/USD: A tough barrier remains around 0.6800

AUD/USD: A tough barrier remains around 0.6800

AUD/USD failed to maintain the earlier surpass of the 0.6800 barrier, eventually succumbing to the late rebound in the Greenback following the Fed’s decision to lower its interest rates by 50 bps.

AUD/USD News
EUR/USD flattens post-Fed rate cut

EUR/USD flattens post-Fed rate cut

EUR/USD soared into a fresh high for September after the Federal Reserve surprised markets with a full 50 bps rate cut on Wednesday, pushing risk appetite into the high side and sending traders scrambling for the buy button.

EUR/USD News
Gold surrenders gains and drops to weekly lows near $2,550

Gold surrenders gains and drops to weekly lows near $2,550

Gold prices reverses the initial uptick to record highs around the $$2,600 per ounce troy, coming under renewed downside pressure and revisiting the $2,550 zone amidst the late recovery in the US Dollar.

Gold News
Australian Unemployment Rate expected to hold steady at 4.2% in August

Australian Unemployment Rate expected to hold steady at 4.2% in August

The Australian Bureau of Statistics will release the monthly employment report at 1:30 GMT on Thursday. The country is expected to have added 25K new positions in August, while the Unemployment Rate is foreseen to remain steady at 4.2%.

Read more
Ethereum could rally to $2,817 following Fed's 50 bps rate cut

Ethereum could rally to $2,817 following Fed's 50 bps rate cut

Ethereum (ETH) is trading above $2,330 on Wednesday as the market is recovering following the Federal Reserve's (Fed) decision to cut interest rates by 50 basis points. Meanwhile, Ethereum exchange-traded funds (ETF) recorded $15.1 million in outflows.

Read more
Moneta Markets review 2024: All you need to know

Moneta Markets review 2024: All you need to know

VERIFIED In this review, the FXStreet team provides an independent and thorough analysis based on direct testing and real experiences with Moneta Markets – an excellent broker for novice to intermediate forex traders who want to broaden their knowledge base.

Read More

Majors

Cryptocurrencies

Signatures