Currency forecasts for the next 6-12 months: Westpac FX update

  • Westpac Investment Bank Foreign Exchange Rate Forecast 2022-2023 – March 2022 Update
  • There is a high degree of uncertainty about short-term trends given the conflict in Ukraine.
  • The Euro should be resilient, with Eurozone governments taking a proactive stance.
  • The maximum level of US interest rates should be lower than expected.
  • EUR/USD is expected to climb to 1.15 by the end of 2023.
  • Soaring commodity prices will boost the Australian dollar.
  • A slightly tighter than expected RBNZ stance will limit the New Zealand Dollar’s gains.

Fed funds rate spike likely to disappoint dollar bulls

Westpac notes that there is a high degree of uncertainty about the global outlook and that there is the possibility of further net dollar gains in the near term on defensive demand.

bannerOverall, however, Westpac expects the US currency to post net losses over the forecast period.

Regarding the US outlook, the bank sees the need for higher interest rates, especially given inflation trends.

He notes; “Russia’s invasion of Ukraine is more of a threat to US inflation than to activity.

Against this backdrop, Westpac has raised its short-term outlook for interest rates with three rate hikes expected by the end of June.

In the medium term, however, the bank is less hawkish on Fed policy. The bank expects inflationary pressures to ease in the second half of this year and it expects real earnings to remain subdued, which will dampen the economy and limit the need for further aggressive rate hikes.

He notes; “Another key factor justifying a quarterly pace of increases from July 2022 and our modest projected peak of 1.875% for the federal funds rate in 2023 is the dynamics of inflation-adjusted wages.”

Overall, Westpac expects US rates to spike lower, which will limit potential dollar support

Eurozone pessimism exaggerated

A second part of Westpac’s argument is that the eurozone economy will perform better than expected.

Although the Ukrainian conflict will inevitably have a negative impact, the bank considers that the markets are too pessimistic about the outlook.

He notes; “The outlook is clouded by a high degree of uncertainty but, in our view, there is reason to believe that the results for Europe are unlikely to be as bad as market participants have recently feared.”

Westpac maintains that the economies are dynamic and that there will be policy measures to deal with the recession.

He considers; “The redevelopment of energy infrastructure and a push for efficiency across industry will support activity and jobs, particularly if the coordinated response from European officials continues.”

Overall, she expects the euro and sterling to be able to rise against the dollar over the medium term; “While acknowledging that further near-term volatility is likely and an escalation of the conflict is a risk, we believe that the best benchmark view for FX markets is a slow appreciation of the euro and the British Pound against the US Dollar over the forecast period.”

Westpac expects the euro-dollar (EUR/USD) exchange rate to find support around 1.10 and climb to 1.5 by the end of next year.

Commodities boost for the Australian dollar

With regard to the Australian dollar, Westpac expects commodity prices to strengthen further and, given that commodities are a key factor in determining the value of the Australian dollar, it expects underlying upward pressure on the currency.

This would pave the way for substantial gains for the AUD if risk conditions were benign; “Given our new commodity price forecasts, AUD fair value models that do not include a subjective proxy for risk scream that it is grossly undervalued.”

The bank notes, however, that the movements of the Australian currency are also strongly influenced by risk conditions. If fear and risk aversion dominate, the currency tends to lose ground.

In this context, he adds; “The Australian dollar is a ‘risky’ currency, so we have been quite cautious with short-term upward revisions to our FX forecast.”

Westpac also expects the Reserve Bank to be cautious about raising interest rates.

Nevertheless, he still expects solid gains for the Australian currency; “As risk concerns gradually ease in the second half of 2022 and the RBA begins its own tightening cycle by August, the boost given to the AUD by high commodity prices may be more sustained.”

The exchange rate between the Australian dollar and the dollar (AUD/USD) is expected to reach 0.80 at the end of 2023.

Housing retreat may limit RBNZ rate hikes

Westpac expects the Reserve Bank of New Zealand (RBNZ) to steadily raise interest rates over the course of the year, especially as inflationary pressures within the economy have increased.

Nonetheless, he expects interest rates to peak slightly below the RBNZ’s most recent peak of 3.35%.

He notes; “We are not ready to embark on the magnitude of the increases that are factored into the RBNZ projections. Instead, we continue to expect OCR to peak at 3% next year. »

Westpac’s main rationale for its lower forecast is that the housing sector will cool faster than expected, which will limit the need for rate hikes.

He adds; “We have long expected the housing market to cool in response to higher interest rates. However, the decline in recent months has been faster than expected. »

Westpac still expects net New Zealand exchange gains with a forecast of the New Zealand dollar against the dollar (NZD/USD) at 0.73 at the end of 2023.

The Canadian dollar should also make net gains given the strength in energy and commodities.

Table of Westpac monetary forecasts covering the period 2022-2023.

Pair square June-2022 September-2022 Dec-2022 June-2023 Dec-2023
EUR/USD 1.10 1.10 1.11 1.12 1.14 1.15
USD/JPY 117 117 117 118 119 119
GBP/USD 1.31 1.33 1.34 1.35 1.37 1.36
EUR/GBP 0.84 0.83 0.83 0.83 0.83 0.85
USD/CHF 0.93 0.93 0.94 0.94 0.95 0.96
AUD/USD 0.73 0.73 0.75 0.76 0.78 0.80
USD/USD 0.68 0.68 0.70 0.71 0.72 0.73
USD/CAD 1.28 1.27 1.26 1.25 1.24 1.25
USD/CNY 6.32 6:30 p.m. 6:30 p.m. 6.25 6.15 6.10