As the year 2021 draws to a close, it’s becoming evident which currencies made it and which currencies didn’t. The US dollar was able to maintain its dominance, while the euro was a let-down. Covid-19 uncertainty hampered Japan’s yen, but a successful vaccination effort for the British population helped to bolster the pound before it lost momentum.
So, who will be left out of the winners’ circle come next year?
In 2021, the euro’s value relative to the US dollar dropped by about 8%. A rate hike by the European Central Bank is unlikely before the end of 2022, according to the bank’s own statements on the matter. This contrasts sharply with market expectations in the United States and the United Kingdom, where three rate increases are expected by the end of the year.
The extremely contagious Omicron variant has expanded alarmingly in recent days, despite the fact that European countries have a higher vaccination rate. This is generating a negative impact on the economy and business climate.
Meanwhile, the European Central Bank (ECB) maintains its belief that the current rise in inflation is a transient phenomenon that will subside in the coming year. In addition to inflation, growth divergence can be seen as the US is on track for stronger growth, whilst Eurozone members are fighting to keep up with it.
At 4.9%, Eurozone inflation is the highest it has been since the currency union was introduced more than twenty years ago. At 6%, it’s the highest in Germany. As recently as two weeks ago, the European Central Bank (ECB) lowered its Eurozone growth prediction for the year ahead from 4.6% to 4.2%. Slow economic expansion in an inflationary climate is likely to lead to deflation, which is bad news for the euro.
The Japanese yen has been the poorest performer of the world’s major currencies. Japanese authorities are under increasing pressure to maintain robust fiscal and monetary stimulus as a result of the country lagging behind other industrialized nations in getting out of the turmoil.
Because of low inflation and low market valuations, Goldman Sachs and Morgan Stanley expect Japanese equities to do well in 2022. Exports from Japan would be more expensive, and demand would be reduced as a result, which might be bad news for the yen. Japan’s Nikkei stock index, the Nikkei 225, is well-known to have an inverse correlation with yen values. The yen may be under pressure next year as a result of this.
According to newly disclosed data, inflation in the United Kingdom climbed to 5.1% in November, the highest annual increase since September 2011. Because of pessimistic economic forecasts and inflationary pressures, a currency’s strength declines when interest rates rise.
After an initial jump, the market realized that this wasn’t a growth-driven hawkish move and corrected its course. It’s possible that in the year 2022, this could turn out to be a policy failure.
Elsewhere, more than 4.3 million British households have been affected by supplier failures since August, according to the country’s energy regulator. This has been attributed to the collapse of more than 20 energy suppliers over the past three months. As a result, this winter’s energy market squeeze could cost as much as £2 billion, according to some estimates. By 2022, the UK may still be dealing with an energy crisis that may have a significant influence on the pound.
Furthermore, many firms have been hit with a headwind because of the ongoing dispute between the UK and the EU over the Northern Ireland Protocol. It’s safe to say that this will have an effect on the UK’s economic growth, as well as the pound’s value.
The loss of public confidence and the weakening of the Turkish lira in the face of monetary policy uncertainty and rising inflation pose threats to the growth and stability of the country’s economy. This has a detrimental impact on the creditworthiness of banks and could lead to government intervention in the financial sector.
Furthermore, the potential government interference with banks’ cash flow could adversely taint the banks’ credit profiles. Such intervention looks certain to come in with a great force in 2022 as the government struggles to get the economy going in an intended way.
With the majority of foreign investors had left Turkey, it will be the billions of dollars in hard currency reserves held by Turkish citizens and local businesses that will determine the direction of the lira next year.
It is also more likely that Turkish residents have lost faith in the lira’s value than international investors have. Since the beginning of the year, the lira has fallen approximately 57%, which is comparable to the losses that brought the ruling party to power twenty years ago.
There is rising speculation among economists like those at Goldman Sachs Group Inc. that a significant rate increase would be necessary before year’s end due to the ripple effect that has been caused by the recent rate reduction.
Two weeks ago, President Erdogan made it clear that he intends to keep cutting interest rates, using Islamic prohibitions against usury as the basis for his current policy thrust. The “severe currency volatility” was cited by S&P Global Ratings as one of the reasons for their latest negative outlook on the country’s sovereign credit rating.
There are also dangers over which Erdogan has no control. Forecasts of tighter monetary policy are increasing as developed-nation central banks, including the Federal Reserve, prepare for the upcoming struggle against inflation. Risky developing market assets, such as in Turkey, may lose their allure if interest rates for the world’s most secure assets rise.
South African rand
After strong gains in 2021 for the South African rand, a more challenging external situation in the commodities market might see the USDZAR pair trade near the 17 mark by year’s end in 2022.
In light of China’s gloomy housing market and economic move toward more high-value-added manufacturing and services, commodity prices have deteriorated in the face of these concerns. This means that in 2022, the rand is expected to decline considerably.
GDP growth is expected to decelerate from 5% in 2021 to 2% in 2022, and inflation is expected to remain within the SARB’s 3-6 percent target range; the central bank may retain rates at 3.50 percent for longer. However, this places the rand at a disadvantage in terms of interest rates compared to its commodities peers, making it more vulnerable to a higher US rate next year.
There is no currency that moves on its own. It is expected that the global economy will continue to rebound in 2022. The epidemic and supply chain disruptions are still causing challenges that the Forex markets will continue to feel. Nonetheless, while some officials are concerned about inflation overtaking economic concerns, others are confident enough to put an end to stimulus. Even though 2021 has come and gone, the events that affected currency rates during the year are expected to continue for a significant portion of 2022.