SSGA: A bumpy ride for currencies in 2023
SSGA: A bumpy ride for currencies in 2023
Near-term risks for the EUR may cause retracement of recent gains.
The US dollar declined, while the Australian dollar was the big winner in January on China reopening and an improved economic outlook. State Street Global Advisors is tactically positive on the US dollar, the euro and the Swedish krona.
“We see a bumpy ride for currencies through 2023 and perhaps into 2024, despite recent market developments—rising risk assets, falling yields, and the falling US dollar—being consistent with a perfect landing. Over the next 3–6 months, we expect greater volatility and some retracement of the sell-off in US dollar,” Aaron Hurd, Senior Portfolio Manager at State Street Global Advisors, says in his latest currency commentary.
Near-term risks for the EUR
Despite the improved economic outlook, the asset managers see some risks for the EUR in the near term, especially against the USD.
“The EUR is facing resistance around 1.10, which is in line with our view that the USD is temporarily oversold. Higher ECB policy rates have been positive for the EUR, but with core inflation yet to peak, there is a risk that the ECB will be forced to move to a restrictive territory, which could further reignite fears of a deeper recession. Finally, there is the risk of the Russia-Ukraine war intensifying to uncomfortable levels as we approach spring may re-introduce some negative risk premium. These near-term risk factors do not suggest a return to 2022 lows but may cause a retracement of recent gains,” Aaron Hurd explains.
Pro-cyclical currencies likely to suffer
More pro-cyclical currencies are likely to suffer the steepest pullbacks, with the EUR caught in the middle. Longer term, the market has it right. At some point, the period of restrictive monetary policy will likely bring inflation under control and the negative impacts of that policy on growth will pass, resulting in a sustainable recovery regime.
“We will then see the USD trend materially lower and pro-growth currencies higher. However, it is too early to aggressively price this scenario now”, Aaron Hurd states.