- Danske Bank Foreign Exchange Rate Forecast 2022-2023 – updated March 2022.
- Ukraine crisis will deepen damage to global economy and increase recession risks
- The dollar will be the main beneficiary, with the US economy outperforming.
- Given the vulnerability of the Eurozone economy, EUR/USD is expected to fall to 1.05 in 12 months.
- The British Pound will be hampered by fundamental weakness in the UK and will not make any headway.
- GBP/USD is expected to weaken to 1.25 in 12 months.
- Overall, the commodity exchange forecast has been lowered due to the strength of the US dollar.
Global recession risks rise, dollar in pole position
Danske Bank was already worried about the outlook for the global economy before the Russian invasion of Ukraine. The bank now considers that the outlook has deteriorated further with a new shock to the global economy due to the Ukraine crisis.
He notes; “The war constitutes another negative global supply shock with the potential to turn into a substantial negative demand shock.”
Danske expects the US currency to be the clear winner in global markets; “The short-term consequences of the war in Ukraine will likely be further strengthening of the USD.”
Inflation, however, was significantly higher than expected, which will certainly complicate the global central bank’s response as banks are unable to protect major economies.
Danske adds; “This leaves very little room for central banks to halt their policy tightening plans, as inflation already before the war had proven to be much more persistent than expected.”
According to Danske, there will be important implications for the global outlook; “We see policymakers remain increasingly determined to reduce global inflation by tightening financial conditions despite the slowdown in global manufacturing.”
There will therefore be a growing risk of recession in the global economy; “Continued hawkish actions by central banks to combat excessive demand only heighten the risk of recession as energy prices are expected to remain high.”
Danske also expects the United States to outperform the Eurozone in relative terms. “The United States stands out as a relative winner, given the large energy, agriculture and defense sectors.”
Both the Federal Reserve and the ECB are expected to tighten monetary policy this year, “in both economies, inflation is soaring and central banks should oppose it.
The Fed, however, is expected to raise interest rates at a faster pace than the ECB, which will provide net support for the dollar and Danske expects the dollar to strengthen further.
He notes; “We are revising our EUR/USD forecast down to 1.05 (from 1.08) in 12 months.”
Regarding the yen, Danske expects the rise in commodities and rising short-term yields to weaken the Japanese currency in the near term.
The Bank, however, expects the yen to regain ground later in the year, especially if longer-term yields decline; “We expect tailwinds for the JPY going forward as commodities finally peak in 2022 and we expect further curve flattening to come.”
He expects the dollar to yen (USD/JPY) exchange rate to slide to 110.0 over a 12-month period.
Scandinavian central banks forced to react
The Riksbank has been particularly dovish over the past year, with no moves to raise interest rates and predicting that rates won’t rise until 2024.
However, inflation rates rose sharply in Scandinavian currencies.
Danske therefore expects the Riksbank to change course in response to rising inflation and raise interest rates this year.
He adds; “Price action this week shows that monetary policy should clearly be part of the puzzle and now that looks like an argument for a lower EUR/SEK.”
There will be big impacts on the Norwegian economy and Danske expects increased krone volatility and a much wider range of possibilities; “In a tussle between rising global recession risks and a substantial positive terms-of-trade shock for Norway, the outcome space for EUR/NOK has widened significantly.”
The bank lowered its forecasts for EUR/NOK and EUR/SEK from February forecasts.
Sterling unable to progress
Regarding the pound, Danske expects the UK to outperform the eurozone, but tends to lose against the US; “We assume that the blow to the UK economy from the Russian invasion and Western sanctions is slightly less than the blow to the Eurozone.”
The bank notes, however, that the pound has significant vulnerabilities, particularly with a current account deficit, and expects the pound to have indeed stalled against the euro.
He notes; “Markets have already priced in plenty of rate hikes and relative rates could start to support EUR/GBP if the ECB becomes even more hawkish than it already has.”
Global vulnerability caps commodity currencies
Danske notes that high metal and energy prices will support commodity currencies, especially in the near term, but there are significant risks associated with a slowing global economy.
He expects high energy prices to dampen the Canadian currency; “Given rising energy prices, the CAD appears to be in better shape than most and the connection to the USD should leave the CAD in better shape than most.”
The outlook for the Australian dollar is also mixed with crucial Chinese policies; “Commodity price stabilization, China’s Covid weakness and rising global recession risks are all downside risks.”
However, he notes that a looser monetary policy would be beneficial; “Longer term, we expect China to step up its stimulus, which will support demand for Australia’s key export products. »
All commodity currencies are expected to weaken against US dollar strength over a 12-month period.
Table of Danske Bank’s currency forecast covering the period 2022-2023.
|Pair||square||1 month||3 months||6 months||12 months|
|EUR/EUR||10.41||10:40 a.m.||10:20 a.m.||10.10||10:20 a.m.|