RBC Capital Markets Investment Banking 2022-2023 Exchange Rate Forecast

  • The outlook for the dollar is slightly more balanced, but still foresees net gains.
  • A less accommodating stance by the ECB will not be enough to stop the euro from weakening.
  • EUR/USD is expected to weaken to 1.08 at the end of 2022 with little change in 2023.
  • Sterling outlook still bearish, especially with sizable twin deficits.
  • GBP/USD still expects to slide below 1.20 at the end of 2022 with solid gains from EUR/GBP.
  • Mixed outlook for commodity currencies, with the New Zealand dollar expected to outperform.

Slightly more balanced dollar outlook

RBC maintains a constructive dollar outlook, although the risk profile is now more balanced; “We are outside the consensus, looking for sustained gains in USD. But recognition of the USD has already grown significantly and the consensus is not as skewed against us as it was a year ago.

The bank examines potential drivers of the US currency’s loss of ground.

He expects the dollar to be vulnerable once further rate hikes are priced in, although he doesn’t see that as likely until 2-year expectations rise to around 2.25%. against 1.3% currently.

The dollar would also be vulnerable to sustained weakness on Wall Street, especially for the Nasdaq index.

“Such a reversal would most likely be driven by a prolonged period of US equities underperformance relative to Europe.”

Overall, RBC expects yield trends to be a key influence on the dollar versus other major currencies. In this context, she expects the yen to be vulnerable.

“Beyond short-term positioning risk, we continue to expect a strong recovery in USD/JPY in 2022.”

This paints a similar picture for the Swiss franc, with the National Bank maintaining an accommodative policy.

“We expect macroprudential rules to be used as the primary means of tackling soaring property prices, and the SNB to be perhaps the last or second-to-last central bank to raise rates. “

The exchange rate of the dollar against the Swiss franc (USD/CHF) is expected to exceed parity by the end of 2022.

The euro is always ready to weaken

Overall, RBC is still positive on the US dollar over the medium term; “Longer term, we still do not accept many of the structural reasons often given for a bearish USD view.”

RBC notes that there has been a significant shift in ECB rate expectations following the last meeting with upside surprises for December and January inflation data forcing a reassessment.

“The question is whether end of January marked the bottom for EUR/USD and whether we will stay at higher levels (end 2022 consensus is 1.14) or if this will turn out to be another false dawn and EUR/USD will make new lows.We are still in the latter camp.

RBC considers that the ECB will fall behind the rate of tightening of other central banks even if it sanctions a slight increase in rates.

The bank also sees geopolitical risks as a threat to the euro, particularly if pressures from the energy supply side intensify.

The euro to dollar (EUR/USD) exchange rate is expected to weaken to less than 1.10 this year.

The decline remains predominant for the pound sterling

RBC has adjusted its short-term expectations on the pound to some extent this month, but remains skeptical of the currency’s progress.

“Our short-term forecast is still negative for the GBP, but we have moderated the pace of decline as long as these uncertainties remain.”

On interest rates, she doubts market expectations are realistic, with the Bank of England aiming for a rate shock strategy to contain inflation rather than a prolonged tightening cycle.

He adds; “The message from the Bank seems to be that the early tightening means rates will eventually have to rise less.”

The bank also remains pessimistic about the longer-term outlook for the pound due to large current account and fiscal deficits.

Although fiscal policy is expected to tighten this year, the positive impact will be offset by downward pressure on consumer spending.

“Longer term, we also expect increased attention to UK imbalances.”

RBC still has a bearish outlook for the pound, with the pound-dollar (GBP/USD) exchange rate expected to fall below 1.20 this year with the euro-pound (EUR/GBP) exchange rate at 0.9100.

Mixed outlook for commodity currencies

As for the Canadian dollar, RBC considers that the markets have priced in too many rate hikes, although it expects the immediate impact to be offset by the fact that US prices are also aggressive.

“A revision to Canada’s 2022 rate forecast could take the market from six hikes to a more moderate four, which would have bearish implications for the CAD.”

The exchange rate of the dollar against the Canadian dollar (USD/CAD) should be above 1.30 next year.

He notes contrasting fortunes for the Australian and New Zealand currencies over the next few months.

He expects the Australian currency to be undermined by a lack of yield support; “Longer term, the AUD is unlikely to regain its G10 high yield status anytime soon. Our AU team is looking for a low terminal cash rate (~1.5%) . »

On the other hand, he expects the Reserve Bank of New Zealand’s more aggressive stance to support the kiwi as the New Zealand currency attracts net inflows; “We expect the re-emergence of carry as a driver of G10 FX to be a theme for 2022 and NZD to be the primary beneficiary.”

The Norwegian krone is expected to make net gains on interest rate hikes with a limited advance from the Swedish krona despite a dovish stance from the Riksbank.

RBC Capital Markets foreign exchange forecast table covering the period 2022-2023.

Pair place Q1 2022 Q2 2022 Q4 2022 Q2 2023 Q4 2023
EUR/USD 1.14 1.13 1.11 1.08 1.08 1.09
USD/JPY 115 112 113 117 119 120
GBP/USD 1.35 1.33 1.26 1.19 1.19 1.21
EUR/GBP 0.85 0.85 0.88 0.91 0.91 0.90
USD/CHF 0.92 0.92 0.95 1.01 1.03 1.04
AUD/USD 0.71 0.71 0.69 0.67 0.67 0.67
USD/USD 0.66 0.69 0.70 0.71 0.71 0.71
USD/CAD 1.27 1.26 1.27 1.27 1h30 1.34
USD/CNY 6.36 6:40 a.m. 6:40 a.m. 6.36 6.33 6.31
EUR/NOK 10.05 10.00 9.90 9.60 9.50 9:40 a.m.
EUR/EUR 10:40 a.m. 10:30 a.m. 10:20 a.m. 10.00 9.90 9.80

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