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

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)


Sources: Refinitiv, Bloomberg, Capital Economics

Jonathan Petersen, Senior Markets Economist,

Jonathan Petersen Markets Economist
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