My name is Mark McCormick, Global Head of FX Strategy at TD Securities here from Toronto.
Today here I'm going to walk you through a quick summary of our FX section of the 2022 Annual Outlook entitled A Year of Many
Quarters.
For the broader FX market in general, we think that investors should expect a diverse set of drivers ranging from divergences across growth, central banks, terms of trade, and valuations. We called these guys the growers, the hikers, the miners, and the discounters.
Keep in mind that TD's macro forecasts of a patient Fed, decent global growth, and US 2s10s steepeners, does argue for a bit of a weaker dollar to start 2022, but the dollar should turn the corner about a year in advance of the Fed's liftoff date in 2023, which would also kind of see reversal of these drivers, particularly some bearish flattening of the US yield curve.
Of course, like all other years, dollar weakness won't be uniform, and we think Swiss and Yen are key exceptions, especially where we do anticipate a little bit reflation light, which is higher rates, higher commodities, and decent global growth, which would reinforce weakness for those guys and a couple of other pairs, particularly in emerging markets.
The euro is going to fall somewhere in between, giving the contrast of different drivers.
The outlook for the dollar and relative value in general, more under the hood of the broad dollar, does reflect our thinking on these core themes, but again, it's unlikely that any single theme will dominate for the year, so we do expect a lot of tactical opportunities to focus on some seemingly different involving drivers and the changing market backdrop. We also don't think that one single currency will dominate on the cross-section of these factors, and the markets likely to find something new to focus that catches all of us by surprise throughout the year. That means the relative winners and losers will shift throughout 2022. So do make sure to tune into our global FX monthly to stay informed on those tactical drivers.
We think the markets are going to continue to draw on some of the old themes like stagflation and re-inflation, and growth and inflation will remain key drivers of markets and policy, and unexpected growth shock throughout the year might invite discussion around deflation in the back half of 2022, but we think there's bigger fish to fry beforehand.
Keeping in line with this, we do think investors should anticipate a year of more significant two-way risks in the dollar rather than a smooth linear path. As a result, we expect more macro risks, lower correlations, and better relative value opportunities than we have seen in the past few years. That dovetails with our expectations of divergences across these macro factors, underscoring that not all countries sit on a level playing field. Covid reopening, growth and inflation mix, central bank responses, and commodity exposure are some of the key drivers that want to form the relative winners and losers here.
Regarding our view on some of these themes, we do see again a modest reflation revival in early 2022 that plays to Yen and Swiss weakness, especially on crosses. We could think here CAD will do well against Swiss Franc. Higher global rates, steeper yield curves and higher commodities, also feed into that view.
For euro we note that our bearish US growth outlook and dovish Fed call underscore the prospects for a rally in early 2022. Ultimately though, we do see euro trading in a 1.15 to 1.18 range and do like fading these extremes on a monthly or quarterly basis. Of the low yielders, that means the euro would likely outperform both Swiss and Yen through different periods of the year.
Meanwhile, we do think that Sterling's hiker and discounter status could support it through early parts of the year. The discount likely reflects the rising inflation premium, but we also think that means there's a lot of bad news price into the currency. In other words, the value you're given as compensation for the poor growth and inflation backdrop. So, we do see sterling trading in a 1.35 to 1.39 range to start the year.
CAD looks very similar to Sterling, given that it's a hiker. Yet the one thing that CAD has is it does get the additional status as a miner. Growth remains a drag for the Canadian dollar, and we do think we'll start to underperform once reflation theme runs its course through the second half of 2022. For the most part, that leaves CAD trading in a 1.22 to 1.26 range.
And finally, we continue like buying Aussie dollar dips, reflecting emerging hiker status alongside exposure to the miner and the discounter themes. We look for a push towards $0.80 in the first half of 2022 and besides Sterling is the cheapest currency on our low frequency fair value framework and benefits from what would look like a positive terms of trade shock.
Please make sure to have a look at the publication and reach out to sales or market strategy you want to discuss in more detail.
Have a lovely day.
