There are some things in life we can predict with a degree of certainty. For example, we all know that the sun will rise tomorrow and meteorologists can even predict the exact time to the minute. Likewise, we all know that one day we will die and that along the way we will have to pay our taxes (unless you visit the British Virgin Islands…) but outside of these rare bastions of certainty, life is kinda hard to predict. Financial markets are notoriously volatile and hard to gauge and this is especially true of the foreign exchange (forex) markets of 2022. Even the predictions of my usual, ‘go-to’ forex website, the currency specialist MoneyTransferComparison need to be taken with an extra serving of salt at the moment.
In this post we will take a look at why this is, and we will try to offer a few humble forecasts for what the remainder of this year may bring.
Foreign exchange markets have always been subject to change. A country’s currency loses or gains value depending on a large and baffling myriad of factors including the volume of international trade it is, its gold reserves, its domestic economic performance and its political stability. To offer some insights as to how this plays out, when a country announces a huge trade deal, its currency exchange usually increases. On the other hand, if a country is invaded then its currency tanks.
Therefore from the latter half of the 20th century until now, there were a few consistent currencies. The USD and the GBP (British pound) typically remained stable despite the odd recession. On the other hand currencies lille the Chinese Renminbi (Or Yen) went from 0 – 100mph as the Chinese economy modernised and then currencies like the Russian Ruble perpetually danced like a yoyo in line with the country’s ever mutating political landscape.
However, right now it appears that all of this may be about to change. The last few years have witnessed a barrage of global turmoil. The COVID-19 pandemic disrupted Western economics for 2 years, the USD responded by undertaking an unprecedented quantitative easing programme and now, the war in Ukraine threatened to remake the balance of power and serve up a world food shortage for good measure.
Still, even considering the constant state of flux in which we find ourselves, we do have a few choice forex predictions for the rest of 2022.
This time last year, the usual cynical suspects were soothsaying the “Death of the dollar”. And indeed things did not look good. The Fed’s extensive programme of quantitative easing put more dollars into circulation than ever before forcing an inevitable drop in the value of the greenback owing to basic supply and demand economics. Then, continued economic disruption caused by COVID ensured that US production remained low, and enduring lockdowns stagnated the entire economies of major stages like California and New York.
But a year is a very long time it seems and now the dollar is going from strength to strength proving that only a fool ever bets against the United States. Whilst the war in Ukraine has been a disaster for pretty much everybody, the US dollar has reaped the benefits as traders look for a stable currency. The soaring price of oil has also restored the value of the petrodollar.
The USD is currently trading at a two decade high of 103.6 and it seems quite possible that it will finish this quarter at this, if not even a bit higher.
Things are not looking good for the British Pound. Firstly, the once formidable currency began to drop against the USD and the Euro following the end of the Brexit transition period in 2020 and since then things have only gotten worse. The UK has so far failed to replace the trade lost as a consequence of leaving the EU and now faces a cost of living crisis which is threatening to force vast swathes of its population into both fuel and food poverty.
The Boris Johnson led Conservative government is perpetually mired in scandal and appears to lack both the competence and the will to tackle any of the United Kingdom’ economic woes – well we say ‘United Kingdom’ but the government’s recent threats to tear up the Brexit Northern Ireland protocol may actually signal the single biggest threat to the Union in a century. If this happens, it will result in a tariff war with the EU, a violent resurgence of the Irish Troubles, and will only further antagonise the fast falling pound.
Inevitably the pound is now trading at 1.23 against the dollar, down from 1.42 a year ago. Things haven’t looked so bad since the 1980’s and whilst it is hard to imagine things getting much worse this year, it may well happen.
When Russia invaded Ukraine in March 2022, the world’s response was swift and daming. Russia was turned into a pariah state overnight, subjected to extensive sanctions and even kicked out of the SWIFT banking system. Initially all of this had the exact effect that one would expect, and the Ruble fell fastl.
However, since then the Ruble has rallied, largely as a direct result of Vladimir Putin’s stipulation that the huge payments for Russian gas be made in rubles.
The ruble has risen 11% against the dollar in 2022 making it the world’s best performing currency by some distance.
Predicting the ebbs and flows of forex markets is never easy and there are no certainties. A sudden discovery of minerals, a disruptive technology or political revolution can send any nation’s currency spiralling or soaring overnight. Still, we are fairly sure that the glimpses and insights we offered here are as accurate as can be right now given the highly unusual times we find ourselves in.