Forex Traders Must Brace For Volatility In 2022
XM Group | Dec 22, 2021 09:47AM ET
King dollar reclaims throne
How quickly narratives can turn around. This year started with the assumption that the major central banks were nowhere close to normalization as the global economy was still licking its wounds from the lockdown shock. The overwhelming consensus was that the dollar would continue to crumble under the weight of fading safe haven demand and a patient Fed.
All that fell apart once inflation fired up. The dollar sliced through its competitors as traders priced in several rate increases by the Fed to cool inflationary pressures, pushing US bond yields higher. Looking into 2022, relative monetary policy will likely remain the most dominant theme for FX performance.
That said, the Australian dollar seems vulnerable. The Australian economy hasn’t recovered so spectacularly, so the three rate increases that markets are currently pricing seem like a bridge too far for the Reserve Bank. This allows scope for disappointment, especially with the Chinese property sector in trouble. A national election scheduled for May could also be crucial for the aussie.
All told, it seems like it might be a year of two halves, with moves in inflation driving shifts in monetary policy and politics adding some spice to the mix. This is a recipe for higher volatility, so get ready for some turbulence.
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