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Uncertainty induced by the arrival of the Omicron variant in late November and the hawkish shift by central banks in December resulted in a larger forecast error for our 6-to-12-month forecasts.
In contrast, however, our expectation of a mild bid in the dollar and Swiss franc over the course of the month, largely due to year-end outflows negating the mid-month risk-off surge, meant out near-term forecasts fared better in what was an event-filled month.
G10
A hawkish shift by the Federal Reserve in December, which saw the central bank speed up its QE tapering pace and also signal 3 rate hikes in 2022, aided the dollar bid witnessed in mid-December. Similar to the Fed, other G10 central banks also started to turn more hawkish. The ECB outlined, prematurely in our view, what post-PEPP QE would look like, while the Bank of England embarked on their first rate hike to bring Bank rate to 0.25%.
The central bank announcements fueled volatility in the run-up to the Christmas break, however, much of their impact was overrun by year-end outflows from the dollar.
For example, GBPUSD was trading around 1.330 during the week of the Fed, ECB and BoE meetings, but rose to 1.35 in the following fortnight as year-end flows favoured USD selling.
Our expectations of the dollar decline towards year-end despite the haven bid from Omicron, resulted in strong near-term forecasts, specifically in higher beta currencies such as CAD and AUD, while our expectation of a continued CHF appreciation versus the euro yielded a strong one-month result. The rationale behind the unusual year-end seasonality was largely due to elevated long positioning in USD and the strong performance in US equities over the course of the year.
G10 Rankings
Emerging Markets
Despite the hawkish shift from the Fed in December, which we largely anticipated, emerging markets didn’t feel the pinch from rising US rates despite the increased speed of QE tapering. This was most visible in MXN, which continued to appreciate against the dollar despite its historically high sensitivity to changes in US monetary policy.
Our bullish view on MXN resulted in a top place 1-month forecast result, while a more neutral view on BRL resulted in a sixth place ranking.
A recovery in the Turkish lira following the CBRT’s decision to embark on a 3-month wait-and-see period meant our more conservative 3-month forecast ranked fifth. Meanwhile, our structurally bullish RUB forecasts relative to the euro generated a strong medium-term ranking, however, such a view is subject to revision in Q1 2022 given the rise in geopolitical risk.
EM Rankings
Authors:
Simon Harvey, Head of FX Analysis
Ima Sammani, FX Market Analyst