In the longer term, the Swiss franc is materially overvalued relative to our fair value estimates and is likely to remain one of the lowest-yielding currencies in the G10. Recent support from a stronger euro, and expectations of tighter monetary policy, will likely give way to a lower franc as the recent weakness in Swiss growth and a likely global disinflation turn sentiment and prompt a dovish shift from the Swiss National Bank (SNB). Eventually we expect the BoJ to further tighten policy. The yen has an advantage as a hedge against a deflationary hard landing as it would benefit from the rapidly falling global yields, and would benefit a bit as a safe-haven bid. In the medium to long term, we are more constructive. We expect the yen to correct lower in the near term before resuming its uptrend. Most of the other major central banks are likely to tighten further and keep rates at a high level for an extended period, while the BoJ is likely to take a slower-than-expected path toward major policy changes. In the short term, the yen has appreciated too much too fast on the back of falling US yields and hopes that the Bank of Japan (BoJ) will tighten monetary policy. the euro, the US dollar, the Australian dollar, the franc, and the Canadian dollar, though it is unlikely to realize its potential until inflation is under control and UK growth bottoms. ![]() In the long-term view, the pound is extremely cheap vs. There are also risks of greater ECB tightening, which could reignite recession fears, and/or an intensification of the Ukraine–Russia war, which could reintroduce the euro risk premium.Ī return of fiscal responsibility and a modestly improved economic outlook justify the pound remaining well off its panic low from September, but the weak economic outlook, the Bank of England’s cautious policy tightening, and a lingering (large) current account deficit suggest some weakness, or at least limited upside for the pound from current levels. However, short-term gains are likely limited as we expect a partial recovery in the US dollar and the Canadian dollar. Our outlook on the euro has steadily improved as lower energy prices boosted the growth outlook, while sticky core inflation increased the likeliness of policy tightening by the European Central Bank (ECB). That means there is room for some near-term Canadian dollar outperformance on US dollar bounces, but the Canadian dollar will likely be flat-to-lower against most non-US-dollar currencies over the longer term. ![]() Against non-US-dollar currencies, we expect the Canadian dollar to largely follow the US dollar, given their strong historical correlation and close economic ties. The shaky commodity market performance, potential housing market risks, and a more cautious Bank of Canada are likely to keep the Canadian dollar on the weak side versus the US dollar for now, despite it being nearly 10% cheap to its long-run fair value. If growth and inflation are either worse or better than expected, the US dollar is likely to bounce higher, accompanied by another spike in equity and interest rate volatility. As inflation and monetary policy normalize and the world finds a path to a sustainable growth recovery, we expect the US dollar to move broadly lower by 10%–15% over the next few years.īut those benign conditions have not yet materialized and may not materialize in 2023. The US dollar declined for the fourth consecutive month in January.
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