FX Talking: Release the hawks

Realised FX volatility is picking up as surging heading inflation prompts many central banks around the world to re-assess monetary policy settings. The more hawkish central banks implicitly – and in Poland’s case explicitly – welcome stronger currencies. The very few resolutely dovish central banks – such as those in Japan, Switzerland and Sweden – seem happy to suffer weaker currencies. We do not see this dynamic changing soon.

In advance of what could be a very aggressive Fed tightening cycle, we remain bullish on the dollar. Currently we would favour that strength being played out selectively. But were Fed tightening to get out of hand, raising fears of recession, we would expect the dollar to rally more broadly. That is not our base case.

The recent hawkish turn from the ECB suggests EUR/USD will probably play out a broad 1.10-1.15 range this year. USD/JPY looks a more compelling dollar bull story – 120 remains our target here. GBP can outperform in the first half of the year as the BoE takes rates to 1.00%. And SEK could be slow to reclaim recent losses.

Geopolitics clouds the CEE region, but in general hawkish central banks should keep CE3 mostly bid. Watch out for Hungarian elections in April, however. TRY is enjoying some new-found stability, but high inflation remains a concern here.

Elsewhere, Chinese investment growth looks to be providing some support to EM commodity currencies. BRL and CLP stand out here, though local politics warns that risk premia could be inserted later this year. For USD/CNY itself, Chinese authorities look happy for it to trace out a 6.35-6.50 range – despite strong trade and portfolio inflows.