FX Talking: New for Autumn/Winter ‘21 - Strong currencies

Strong currencies are the hot new season trend in FX markets. No longer are nations battling to devalue their currencies to secure a slice of shrinking export markets. Instead, the inflationary impact and direct cost of higher energy prices have caused policy makers to have a rethink on FX policy.

The stand-out here is China and the renminbi, but arguably the UK and the US are moving in this direction as monetary policy normalises. Having largely attained energy sufficiency over the last decade, the US is better positioned than many to weather the energy price scare. Yet the Federal Reserve does seem to be taking the inflation threat more seriously and in September presented a set of Dot Plot projections for the Fed Funds target which were way above market expectations. The adjustment of the market towards the Fed should be a core support for the dollar over coming months. And we are now raising our dollar forecasts for end year 2022, too.

In Europe, the European Central Bank has yet to shift beyond its ‘transitory’ take on inflation and we see EUR/USD as vulnerable to 1.13 over coming months.

A more hawkish Bank of England sees GBP better placed to withstand dollar pressure. Yet our team is uncertain whether the BoE will act as early as the market expects. 0.8450/70 may remain the range low for EUR/GBP.

But central to FX markets will remain where a country sits on the energy export/import matrix and how central banks plan to respond to inflation. The two are related through income shocks and output gaps. Well-positioned are Norway, Canada and Russia. Poorly positioned are Japan and Turkey. We expect these core trends to continue to play out.