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MTFX Currency Update, January 2022

MTFX Currency Update, January 2022
FX Monthly
Currency Pair Q1 2022 Q2 2022 Q3 2022 Q4 2022
USD/CAD 1.24 1.20 1.23 1.21
EUR/USD 1.14 1.14 1.16 1.17
GBP/USD 1.37 1.38 1.38 1.39
USD/JPY 115 115 114 113
USD/CNY 6.38 6.37 6.36 6.35
USD/MXN 20.5 20.5 21.0 21.0
Other Crosses
EUR/CAD 1.41 1.37 1.42 1.44
GBP/CAD 1.70 1.66 1.70 1.71
CAD/JPY 93 96 93 92

USD:  Could the greenback’s strength begin to fade?

In 2021, the dollar had a fantastic year, gaining territory against most of the major currencies. Some market observers predict the dollar will replicate its previous performance now that the Federal Reserve is ready to embark on a slightly more aggressive pace of monetary policy normalization than was expected a few months ago. However, as we begin the new year, it's worth remembering that the broad US dollar index has down 1.7 percent since its October 2021 high. We continue to predict only three raises in 2022, which is significantly fewer than what the markets are now anticipating. With the Fed's net asset purchases expected to end in March, long-term interest rates could rise more quickly.

CAD:  Looks like the loonie could get stronger

The Canadian has been on a tear. USD/CAD dipped below 1.25 last week after peaking above 1.29 at the end of December 2021. In the following months, we predict the loonie to appreciate much more. In 2022, consumer expenditure in OECD economies is expected to continue relatively healthy, while global industrial production is expected to hit new highs. This suggests that commodity prices are likely to stay high, if not increase even higher, which is great news for Canada. In Canada, the labor market concluded the year with a bang. Including the 55,000 jobs added in December, the labour force increased by 890,000 during the year.

Most economists predict that the Bank of Canada will raise rates in March, and that interest rate differentials between Canada and the United States will remain close to current levels in 2022. The Canadian currency should appreciate due to rising commodity prices, a current account surplus, a solid labour market, and favourable interest rate differentials. Despite the uncertainties generated by the latest COVID variation, the Canadian dollar should strengthen further in 2022, possibly reaching 1.20 against the US dollar.

EUR:  It’s the same old story for the euro

To say the least, the Euro in 2021 was a disappointment. After having ended 2020 at a multi-year high, the currency depreciated 6.9% in the twelve months following. While there are several factors contributing to this devaluation, the majority of it occurred in the second part of the year as supply chain concerns worsened, energy prices and inflationary pressures increased, and hygienic volatility became more prevalent.

The beginning of 2022 is off to a stumble as the Omicron variant has forced closures among several member states. Growth in the common area will likely be impacted by the latest measures but should be spared from previous sharp declines witnessed in earlier waves. Curiously, the ECB remains anchored in the “transitory” camp. The central bank has admitted that inflation would likely be above the 2% target for longer than they initially expected but they continue to see inflationary pressures abate by the end of 2022. Overall, we expect the euro to remain relatively tepid in 2022. The common area will have to contend with supply chain issues and inflationary pressures while the ECB is unlikely to signal a significant change in policy until later this year. 

GBP: High drama in UK politics likely to hurt the pound

UK GDP figures released this past week beat expectations and suggested the Omicron impact on growth may ultimately prove modest. Ultimately, this should keep the quite aggressive hawkish expectations on BoE tightening alive. Domestic fundamentals should continue to support the pound and inflation should continue to edge higher. All this should offset some weaker retail sales on Friday. We expect the BoE to remain quite conservative on rate hikes and as such expect the GBP to remain rangebound in 2022 against most of its peers.  Expect trading range for the GBP/USD: 1.32 -1.37.

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