Insight & Analysis

Sterling not the only currency under pressure

Published: Nov 2022

As the UK attempts to restore confidence in the pound, a number of other currencies will face their own dollar-related difficulties over the coming months.

While the pound has been centre stage lately, other currencies are also expected to face continued headwinds as a combination of rampant inflation and domestic growth issues increase the attractiveness of the US dollar.

“For example, the ongoing energy crunch and geopolitical uncertainties put the European currency bloc in a difficult position,” says Paul Mackel, Global Head of FX Research at HSBC.

Currencies that are exposed to risk and cyclical growth – as well as housing market vulnerabilities – are likely to face high or higher volatility. These include the Swedish krona, the Australian dollar, and the Norwegian krone to a certain extent according to Vasileios Gkionakis, EMEA Head of FX Strategy at Citi.

Kenneth Broux, Head of Corporate Research, FX and Rates at Société Générale also refers to the Australian dollar and the euro as candidates for weakness over the remainder of 2022, noting that it is difficult to see the euro rebound without a resolution of the energy crisis, a recovery in Chinese growth, and an end to the tightening rate cycle in the US.

“Demand for dollar liquidity before year-end and populist spending plans by the new government in Italy could also exacerbate the euro’s woes,” he adds.

Broux’s assessment of the Aussie’s prospects is also informed by events in China. “The currency correlates closely with the yuan and the performance of emerging market equity indices more broadly,” he explains. “The AUD will stay cheap as long as optimism does not return over the outlook for growth in China, and the policy rate differential with the US keeps widening.”

He agrees that the NOK and SEK could also struggle if broader market volatility stays elevated since these are the currencies that typically suffer when demand for liquidity is high and investors scale down risk positions.

All major currencies will remain under the pressure of the strong dollar until the Fed decides to take a breather on its hawkish run says Ipek Ozkardeskaya, Senior Analyst at Swissquote. “I think the Fed is making another big policy mistake this year by letting the world economy burn to the ground,” she adds. “This is not how they will control inflation – this is how they will send economies tumbling and make sure that global rates remain higher – for longer – for everyone.”

The Bank of England’s resolve will be tested further in the coming months and the world will be watching to see if central banks stay true to the inflation fight or buckle amidst market volatility and weaker economic performance reckons Interactive Brokers Senior Economist, José Torres.

Meanwhile, some of the biggest companies in the world are feeling the effects of the strong dollar. Steve Priest, Senior Vice President Chief Financial Officer at eBay revealed on a recent earnings call that currency volatility reduced the company’s total value of goods sold by 6% in the third quarter, up from 4% in Q2.

“If the US dollar remains in a strong position and that continues through 2023, there is a natural challenge that you would incur as you get into 2023 because it is much further out from a hedging standpoint,” he explained.

McDonald’s CFO Ian Borden told investors last month that the continued strength of the dollar was one of the reasons why it had reduced its guidance on capex. “About 60% of our capital spend is outside the US so we are just translating that spend back into fewer US dollars,” he said.

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