Happy new year, FX already has its new year resolution mapped out for it. High inflation and higher US rates, it will be a year of hard work, but the ‘results will be worth it’. Putting the new year puns to one side FX is in for a big year as US consumer prices are throwing all timelines and expectation out the window.
The 0.5 per cent rise in December capped off what is now the fastest year on year read in CPI since 1982 at 7.0 per cent. Core CPI (ex-food and fuel) was 0.6 per cent in December and 5.5 per cent year on year. The 2020/21 “transitory” story is gone – 2022 will be the ‘price stability’ game as ‘entrenched’ high inflation would be a disaster for the US economic recovery, consumer and political landscape – the rate handbrake is coming it’s just a question of when.
This means that 2022 will not be the year of the Tiger but the year of the Hawk. Which is perfectly summed up by the perma-dove Lael Brainard turning full hawk in her latest testimony. These two quotes from Brainard’s testimony are a glimpse of what’s to come in 2022: “The committee (FOMC) has projected several hikes over the course of the year…we will be in a position to do that I think as soon as our purchases are terminated, and we’ll simply have to see what the data requires over the course of the year, and you know we started to discuss shrinking our balance sheet,”
That means March is a live rate hike event. And according to the FOMC’s dot plots it would be the first of three possibly four rate rises this year alone.
What is also different about 2022 compared to post-GFC or the rises in the 1990s is that the Fed is chasing inflation not pre-empting ‘expected’ inflation. So, brace yourselves the rate handbrake could lead to an unexpected recession.
From an FX position there is only one story to look at – the USD reversal. 2021 might have been the year for being long the USD but 2022 looks like being the opposite.
Have a look at the strong breakdown in DXY
This breakdown is being driven by EUR/USD and there is clear selling coming on the USD pushing the pair to $1.14
However, it’s the same reaction in most risk currencies seen in GBP, AUD, and CAD. Which suggests that we are going to have to work hard in 2022 as we enter a new phase of the – post COVID trading world.