The European Union and emerging markets, the Pacific region, and Scandinavia - the variety of targets for short-term trade and investment for the future makes you wonder which currencies are more attractive for trading in the new year. This article presents the opinions of reputable traders.
The threat of inflation, combined with the opening of the interest rate hike season, is forcing traders and investors to rethink their action plans, trying to understand how well different currencies can withstand - or use - the rising wave of global consumer prices.
Small hedge funds are extremely interested in highly profitable emerging markets or in large commodity producers who will benefit from rising prices. At the other end are analysts at Goldman Sachs Group Inc., who are more focused on the possibilities of misjudging the policies of central banks. In general, they embody a willingness to accept currency appreciation and extend the cycles of rate increases against the background of growing inflationary risks. And still, others just think to hide in the dollar - the world's largest reserve currency and a safe haven.
In itself, the tendency to revise portfolios and strategies is a clear indicator of how widespread concerns about global inflation have become since even intraday traders in the foreign exchange market are forced to sit down and pay attention to it. Since the trend of the last year towards the rapid redemption of indices, primarily the S&P 500, is losing momentum, reshaping the patterns of chart fluctuations familiar to traders, even those who are mainly engaged in technical analysis are forced to pay attention to economic events.
Typically, this is a sign to avoid or bet against the currency, price increases are so common that traders are considering exotic currency pairs that offer relative value and considering whether central banks will deviate from traditional instruments to curb consumer price increases without killing growth. The days of inflation skeptics are behind us.
"We've always thought the market has underestimated the macro risk that inflation poses," said Paresh Upadhyaya, director of currency strategy at Amundi Pioneer, which oversees $316 billion.
So far, the dollar has held its positions firmly, relying on the prospect of tightening the policy of the Federal Reserve System and some confidence that local officials will be able to contain price pressure. Even with extremely negative real bond yields (which, taking into account inflation, sweeps the floors altogether), the dollar has grown this year against almost all of its largest counterparts, and many observers predict that it will remain strong in 2022.
A survey from Bank of America released this month showed that the dollar's position among investors was mostly bullish. As an adverse risk, possible delays in raising rates from the Fed were most often indicated.
Nevertheless, many financial managers prefer resource-linked currencies as a way to positively influence global inflation risks. Currently, long positions on the Australian and Canadian dollars, as well as on the Norwegian krone, are popular, preferring to express these transactions through the Japanese yen and euro, rather than through the U.S. dollar.
"We're positioned for commodity prices at a minimum to be stable, and to actually continue to move higher," said Jack McIntyre, one of the proponents of this approach.
Indeed, taking into account the forecasts of economists, who still expect economic growth after the reduction of pandemic threats, increased demand will support the economies of countries that dominate commodity markets. This is a good strategy for hedging risks even in short-term trading for the whole of 2022.
McIntyre also stressed that given that inflation is becoming a potential problem for some central bankers, many of those who previously may have wanted to lower the exchange rate may now favor a slight increase in its rate.
"If inflation is becoming more of a concern, and it looks like it is, I think we could actually go to an environment where countries not only tolerate, but embrace a stronger currency," McIntyre said.
How central banks choose to react is of course critical to how currencies are likely to behave.
Regions - promising and not
For example, Europe is facing inflationary pressures with might and main, not least from energy sources. As a result, the eurozone monetary authorities seem to have fewer opportunities than regulators in some other countries to rely on rate hikes. According to Michael Cahill, an economist at Goldman Sachs in London, investors have the opportunity to protect themselves with the currencies of neighboring countries, whose central banks may be better able to respond to the demands of the times.
According to him, due to rising inflation, the Swiss National Bank - a body that has historically had a fairly large presence in the markets - is less likely to intervene to limit the value of the franc. In addition, the Swiss currency may become a haven if the risks of European inflation also begin to affect growth. It seems, in his opinion, there is still room for growth against the euro.
Sweden could also provide similar safe haven opportunities within the region if inflation triggers a more aggressive turnaround from the central bank, potentially helping to strengthen the krone against the single currency. To do this, Cahill analyzes an options-based rate that is paid if the euro reaches a certain level against the currencies of Sweden and the United States.
Other analysts see the upside potential for the Australian dollar versus its New Zealand counterpart, arguing that the market did not take into account the sufficient tightening of prices by the Reserve Bank of Australia compared to its counterpart.
Long positions on the Egyptian pound, Kazakhstani tenge, and Uzbekistani soum are also interesting. Possibilities for the Indian rupee and the Indonesian rupiah are not excluded. "On a volatility-adjusted basis, the carry is very attractive," says Paresh Upadhyaya.
The England market is regarded as one of the most undervalued in 2021.
However, investors may not have to look for good from good if the dollar continues to rise. Morgan Stanley, for example, expects the Fed's hawkish response over its largest developed market counterparts to enhance the inflation-adjusted yield advantage that the U.S. interest market has. Experts at one of the world's largest investment banks expect the dollar to benefit at least in the first half of 2022.
"This should support USD strength, particularly versus the low yielders, which are more sensitive to real yields," Matthew Hornbach said in a note to clients this month.
In fact, this is a rather controversial point, since U.S. oil reserves are depleting, and winter has just begun. Inflation accelerated, and industrial production fell seriously in November due to fears of inflation and a new strain of coronavirus, leveling with November 2020. Therefore, the first quarter may turn out to be more difficult than MS analysts expect. But really, while the dollar only wins against the background of other currencies. The trend is likely to continue in 2022.