FX year ahead 2023: Recessions and trend reversals
XM Group | Dec 06, 2022 11:11AM ET
Dollar rally enters final chapter
It’s been a stormy year for FX markets, characterized by severe episodes of volatility as central banks and governments across the world unwound the extraordinary stimulus rolled out during the pandemic. Being long the US dollar was the only trade that worked, with the reserve currency crushing everything in its path as the Fed rolled out the big guns.
Looking into next year, this wave of dollar strength could persist early on, but perhaps reverse later in the year. The logic behind this call is that even though some of the elements that fueled this stunning rally seem to be losing their kick, it’s still premature to envision a bearish trend reversal because the fundamentals of other currencies are even gloomier.
The aussie has been the most oblivious to domestic policy out of the three dollars and put on a stellar performance in March when the RBA remained dovish as other central banks commenced rate increases. Higher commodity prices following the Ukraine war and strong demand from China were a boon for Australia’s current account. But those effects have started to fade.
All hopes for the currency next year rest on China proceeding swiftly with its reopening plans. Stronger growth in its main trading partner would give the Australian economy something to lean on should the RBA struggle to contain inflation and decide to push up rates a lot higher than what it has flagged.
The bearish scenario for the aussie is the Fed hiking rates above 5% and the RBA pausing before the cash rate reaches 4%. But even then, this would only be half the equation and much would still depend on the outlook for the Chinese economy and overall sentiment.
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