Currencies to watch for 2023

Currency volatility returned with a vengeance in 2022. Will next year see more of the same? Wild price swings, trends and extensions? Or will we see a calmer year, and lower volatility return?

It’s been a rollercoaster ride for EURUSD:

Starting the year in a range above 1.11, before trending sharply lower into September and the 0.95 handle. Everything was going wrong in Europe. Energy prices soaring on the back of the Ukraine conflict, concerns about fragmentation within the bloc if the ECB couldn’t contain the spread between the borrowing costs of the eurozone nations, and an ECB that was slow to act and join the global rate hike cycle.

Now, the ECB is promising to keep on hiking, with President Lagarde saying that they would “need to do more than markets expect” at the last central bank meeting.

So, with a central bank catching up to the Federal Reserve, the economy not suffering as terribly as feared, and EU gas prices down to more sustainable levels, is there more upside ahead for the euro?

Or is this all priced in? Could tight energy markets wreak havoc on the eurozone economy once more in 2023? Perhaps an economic downturn could see the ECB lose their bottle and bring an end to rate hikes…

There’s no clear consensus here yet. For now, markets seem to be looking on the bright side. Perhaps there’s an argument that there’s not too much room for optimism to push the euro higher without further impetus from the data?

The King will return

Danske bank analysts see a strong year for the US dollar, and see EURUSD hitting 0.98 again within 6 to 12 months. Here’s what they say:

A key assumption behind our FX forecasts is that of a stronger USD and tightening of global financial conditions. Risks to this assumption primarily lies in Fed delivering an actual policy pivot – possibly due to inflation pressures fading fast, a Chinese re-opening, a global capex uptick and/or industrial production increasing.

Essentially, they argue that a global economic slowdown would likely be positive USD, while a global economic recovery could be negative USD. However, without the economic slowdown, will inflation remain high? If so, would that perhaps force the Federal Reserve into even more rate hikes, and potentially widen the interest rate gap to other central banks once again?

__BoJ - could they actually normalise policy in Japan? __

JPY bottomed out in October when Japanese officials intervened above the 150 handle in USDJPY. Ever since, the JPY has strengthened, buoyed by a narrowing of rate differentials, the prospect of further support from officials and, recently, hopes of a return to normal rate policy.

The big red candle closing below the 200 day moving average was the result of Japan’s central bank surprising markets by widening the yield curve control band, and allowing the 10 year bond to trade 0.5% either side of zero.

This was interpreted as a sign that the central bank intends to normalise policy and exit the negative interest rate regime in 2023, perhaps as Governor Kuroda retires.

Depending on the context,the yen could continue to strengthen if this policy change materialises.