We expect “high-beta” DM currencies to fall further
← Previous We think the Mexican peso will fall further
EM FX has a bit further to fall; some pockets of greater concern Next →
client area » Publications » FX Markets » FX Markets Update
My subscription
...
Filters
My Subscription All Publications

We expect “high-beta” DM currencies to fall further

22 July 2022
Jonathan Petersen Markets Economist
22 July 2022
Download
Save
Despite their recent rebound, we still think that “high-beta” developed market currencies will weaken further against the US dollar for the remainder of the year.
  • Despite their recent rebound, we still think that “high-beta” developed market (DM) currencies will weaken further against the US dollar for the remainder of the year.
  • DM currencies have risen against the greenback over the past week or so, reversing some of their sharp depreciation in June. (See Chart 1.) Most high-beta currencies – i.e., those most sensitive to risk sentiment and the global economic cycle – are now broadly unchanged against the dollar since the start of July, in line with the rebound in global equities. (See Chart 2.)
  • We expect this rebound in high-beta DM currencies to prove short-lived for three key reasons.
  • First, we think the Fed will continue to tighten global financial conditions and that risk sentiment will remain weak for some time yet. We suspect this will act as a headwind for high-beta currencies, given the tight correlation between these currencies and “risky” assets. (See Chart 2 again.)
  • Second, we think that global economic growth will continue to disappoint over the rest of the year. Indeed, mounting concerns about the growth outlook – reflected, for example, in the fall in market-implied breakeven inflation – have already weighed on the high-beta currencies relative to other DM currencies. (See Chart 3.) Given our view that commodity prices will fall as the threat of global recession broadens, we think the current accounts of cyclically sensitive DM economies will worsen.
  • Third, we doubt central banks in most of these economies will be able to raise interest rates by as much as investors currently anticipate due to overextended housing markets. (See Chart 4.) For example, the Bank of Canada’s larger-than-expected 100bp hike last week will further erode housing affordability and, in our view, increases the likelihood that a housing-induced downturn will force the BoC to reverse course.
  • The upshot is that we continue to expect high-beta currencies to lose further ground against the US dollar over the rest of 2022, and we think the downside risks to that forecast have increased.

Chart 1: Changes Vs USD Since 1st June (%)

Chart 2: CE High-beta DM FX Index (100 = 1st Jan. 2021) & MSCI All Country World Index (USD)

Chart 3: Ratio* Of CE High-beta Index To CE Low-growth Index (100 = 1st Jan. 2021) & 10Y TIPS BEI (%)

Chart 4: CE End-2023 Forecasts For Policy Rates Less Overnight Rates Implied in Swap Markets (bp)

*AUD, CAD, GBP, NOK, NZD, SEK vs EUR, CHF, JPY

Sources: Refinitiv, Bloomberg, Capital Economics

Jonathan Petersen, Senior Markets Economist, jonathan.petersen@capitaleconomics.com

Europe
Global
North America
US
FX
Markets
Download
Save
Jonathan Petersen Markets Economist
Continue reading
Jonathan Petersen Markets Economist
Download
Save

More from FX Markets

FX Markets Weekly Wrap

Dollar falters on continued risk-on rally

The US dollar continued to struggle this week as equity markets extended their rebound and commodity prices also rallied: the currencies of commodity exporters and other economies most exposed to global growth generally fared well. Wednesday’s lower-than-expected US CPI data provided the latest catalyst: the S&P 500 rose around 2% following the CPI report, and the DXY index registered one of its worst days in recent years, falling by more than 1%. Nonetheless, further hawkish comments from FOMC members, weak credit data out of China and today’s strong US consumer confidence survey have provided some support for the greenback. Our sense remains that the dollar rally will resume before too long. It will take a lot more good news on inflation before the Fed changes tack. The minutes from the last FOMC meeting, released next week, and the Jackson Hole conference the week after may well push back further against the notion that the Fed is “pivoting”.

12 August 2022

FX Markets Update

We doubt the Canadian dollar’s resilience will last much longer

The Canadian dollar has held up relatively well against the US dollar so far in 2022, but we think the factors underpinning the loonie’s resilience will fade and push it lower against the greenback over the next couple of years. In view of the wider interest, we are also sending this FX Markets Update to clients of our Canada Service. 

11 August 2022

FX Markets Update

Why we don’t think the dollar has peaked yet

Although we think the end of the Fed’s hiking cycle is drawing nearer and that yields of long-term US Treasuries have already peaked for this cycle, we don’t believe this necessarily spells the end of the dollar bull market. Instead, we expect safe-haven demand to boost the greenback as the global economy weakens.

11 August 2022

More from Jonathan Petersen

Capital Daily

We think risks for the euro remain skewed to the downside

Our base case is that the euro will weaken a bit further against the US dollar from here, but the balance of risks suggest to us that it could fall well below our current forecast for parity.

7 July 2022

FX Markets Chart Book

We expect the US dollar to continue trending higher

While the strength of the US dollar already reflects expectations that the Fed will continue its aggressive policy tightening, we think that disappointing global growth and weak risk sentiment will underpin further strength in the greenback this year. EM Drop-In (Thurs, 7th July): Join our economists for their regular monthly briefing on the hot stories in EMs – and those that aren’t getting the attention they deserve. In this 20-minute session, topics will include the outlook for EM FX markets after the recent sell-offs. Register now.

30 June 2022

FX Markets Weekly Wrap

We think the dollar rally has paused, not ended

Amid mounting concerns about the global growth outlook as more central banks raised policy rates, the US dollar looks set to end the week broadly unchanged against most major currencies. Although we suspect the greenback may struggle to make new highs in the near-term, we think the backdrop will remain favourable for the dollar over the coming quarters. If, as we anticipate, the US (and global) economy slows, but avoids recession, we think the US will remain relatively well-placed to weather tighter financial conditions. And if downside risks to economic activity materialise, then the dollar would probably benefit from “safe-haven” demand, as has been the case for much of this year. Asia Drop-In (30th June, 09:00 BST/16:00 SGT): Are Asia’s central banks behind the curve? Can the Bank of Japan and People’s Bank of China continue to go against the grain? Find out in our special session on what global monetary tightening looks like in Asia. Register now.  

24 June 2022
×
↑ Back to top
We use cookies to ensure you get the best experience on our website. Read our Cookie Policy for more information.

Email

business@capitaleconomics.com

Phone Number

+44 (0)20 7823 5000

Capital Economics Ltd

5th Floor, 100 Victoria Street
Cardinal Place
London
SW1E 5JL

Services

Insights

About us

Terms of Website| Terms of Sale| Privacy|

© 2023 Capital Economics Ltd