FX Monthly


Posted Under: Weekly updates

What Happened

  • The buck managed to recuperate its losses from 2020 as 2021 indeed turned out to be a year of economic recovery, though uneven.
  • U.S. Dollar (USD) advanced by 6.5%, according to the Dollar Spot Index (DXY) as economic momentum made America a go-to place for investment.
  • The Euro (EUR) fell by 7.0% in 2021 after a year of struggle containing the pandemic and its negative effects on commercial trade.
  • Amongst the majors, Pound (GBP) was one of the more resilient ones to the dollar rally, only depreciating 1.0% as the U.K. experienced better-than-expected growth for Q4 2021.
  • Emerging-Market (EM) currencies climbed by almost 1.0% from beginning to end, but experienced wild swings as COVID hit us with the Delta and Omicron variants of the virus.
  • Although vaccines and boosters were developed and distributed, many have chosen not to take that path to immunization, thus why we experienced turbulence in labor and productivity with ongoing flare-ups.
  • One thing that has remained consistent is political friction and even diplomatic disagreements that have weighed on spending plans and expansion.
  • Equity markets in the U.S. flourished in 2021, reaching new records as the Dow Jones (DJI) surged by 28.0% and companies registered high earnings.
  • Despite a major real estate tycoon defaulting on debt and butting heads with various nations, the Chinese Yuan (CNY) increased its value by 2.7%.
  • With spending making a big recovery after a very high savings rate in 2021, the Canadian Dollar (CAD) was one of four currencies that actually improved against the greenback by 0.75%.
  • We foresaw the swings for the Mexican Peso (MXN) through 2021 and witnessed it lose over 3.0% of its value regardless of oil’s rise.

GreenShootsFX’s USA’s View

  • We believed 2021 would see the buck lose further ground, but it recovered instead as speculation over Fed monetary tightening became a major boost.
  • 2022 could be another year of gains, but we put some doubt on it as we believe the Federal Reserve will not be able to hike as much as it is forecasted.
  • Inflationary growth was scary in 2021, but a slowdown could arrive as the world overcomes supply-chain issues.
  • Russia will be a major country of influence in 2022 as it prepares to challenge the status quo via military pressure.
  • Meanwhile, Euro resurgence will depend on whether Russia and the rest of Europe can get along or become entangled in sanctions.
  • The Bank of England was the only major central bank to increase interest rates last year and GBP could rise further if economic indicators merit one more hike.
  • China’s transition to a more service-oriented economy may cause havoc in demand for raw materials and other imports.
  • 2022 could end up giving us more of the same, meaning another year of figuring out the medical and economic impact of COVID as people return to travel and work.

In Focus

  • Although some things did not materialize, USD climbed out of its hole. The revival came after an unprecedented 2020 pandemic.
  • A new administration tackled the pandemic right away with vaccines and proposed a major spending bill to counter COVID’s damage.
  • Nevertheless, the U.S. struggled to contain infections, deaths, and certain communities and industries remain highly affected.
  • Gauging whether Delta or Omicron could pose more damage to economic growth made for a lot of wild swings for many currency-pairs.
  • We continue to lack a lot of clarity as COVID has made markets more unpredictable while it transforms from a pandemic to an endemic.

In Depth

A glance at any currency chart for 2021 makes it clear that the U.S. Dollar climbed enough to match the losses that were incurred in 2020. Our analysis for last year focused naturally on all of the questions about life itself that COVID made us question. How soon could the medical threat to our bodies come to a swift end? Could vaccines really make a dent on the virus’s progress? Would people go back to work and attend public events more freely?

The answers provided were as follows: The threat remains with us although it seems the disease is milder on patients, especially if vaccinated. Vaccines made a dent for sure, but opposition to them has been much stronger than the medical community predicted ultimately causing problems to productivity. In the end, people that were working from home stayed that way and public gatherings made a comeback, but not anything like pre-pandemic.

Since we are still fighting COVID and trying to maneuver around its ugly statistics, it is hard to envision much for the long-term, while it seems some early-year commitments could run into trouble later. Looking back at last year, there were moments of deep disillusion because right as it seemed like we would be back to a sense of normalcy, a new variant of the virus would evolve and crush our spirits.

The “Summer of Joy” did not happen as U.S. President Joe Biden had wanted. His hope for a very celebratory 4th of July that would come to symbolize our nation’s arrival at herd immunity never came. Instead, the Delta variant of the coronavirus made sure to send workers home and parents to wonder if there would be a return to schooling from the household. Mask mandates were set back into effect while venues started requiring proof of vaccination to gather with others. This naturally caused a slowdown in port activity that only exacerbated a supply-shortage that aided inflation to rise even higher.

Delta made the dollar a safe-haven in the midst of yet another round of shutdowns that prevented economic indicators globally to recover as central banks desired. However, prices rising could not be ignored as inflationary growth threatened further advancement and hit records. The Federal Reserve, which tasked itself to make the financial environment as accommodative as possible, started to face mounting pressure to get rid of some of the stimulus measures that it devised to prevent a true crash from ever developing.

The argument became that all across the board everything has gotten very expensive with suppliers suffering a lack of materials, unfinished and finished, while regular citizens coped with a heavy toll at the gas pump. WTI Crude Oil surged by over 60.0.% in price per barrel for the year. Additionally, homes are costly while there are not enough properties for the demand, and even used vehicles, a typically fast depreciating asset, experienced a strange rise in value. Autos continue to be significantly afflicted by the microchip shortage and increased demand from regular as well as commercial drivers.

Delta became less important as we got to Autumn, with expectations once again growing that the economy was past its worst stage and could gradually recover. Additionally, numbers kept improving for the vaccinated population and hospitals were relieved a bit. Around September, it was clear that the Fed could afford stepping off the gas a bit and taper some of its quantitative easing purchases. This only made the buck more attractive and along with the idea that labor was getting closer to full employment, it provided traders enough confidence to start calling out for interest rate hikes.

If the ‘Summer of Joy’ was not meant to be, we were not going to get a winter of solace either. November marked yet another painful chapter to this COVID story as the Omicron variant spread with a vengeance across the world. At the moment, we are digesting how much of a negative impact it had on the end of the year, with some countries doing steady while others certainly economically hit. U.S. Gross Domestic Product is on pace to expand at an annualized 3.5% for Q1 of 2022, down from the achieved 4.9% for Q4 2021.

Omicron making a mess of the end of last year and beginning of this one has thrown a wrench on outlooks for overall growth and a less worried world. Indeed, the idealistic in us all has taken a hit. Even technocrats such as Fed Chairman Jerome Powell have had to warn that we should not expect the growth rallies and upward swings throughout 2021 to duplicate in 2022. As he remains the main guiding hand of the Fed for another term, Powell is trying to caution about thinking there is a clear path to a hot economy. Officials are ready to combat inflationary growth via the increase of interest rates and are willing to admit that the increase in prices does not seem like a temporary concern.

It is important to note that the first pieces of data we have been presented thus far at the start of 2022 are revealing a somewhat hurt economy. Consumer Price Index figures did show a yearly pace that was the highest since 1982, however, CPI for December dropped to just 0.5% after being near 1.0% the two months prior.

On the suppliers’ front, Producer Price Index figures also showed that prices are not blowing up at a high pace. PPI for the year came in at 9.7%, but the December figure came in at just 0.2%, which marked the slowest pace seen in thirteen months. Furthermore, Retail Sales as well as Industrial Production contracted, the former by twenty times the expectation at (-1.9%) vs (-0.01%). When it comes to Consumer Confidence, it has only declined these last two months and stayed around its lowest readings ever on record.

So where does that leave the Fed now? It has planned for 3-4 hikes this year, but commentary from Powell along with the numbers presented above do leave us with a sense of blurriness. Could inflationary pressures decline to the point that the Fed delays or even hesitates to increment rates? Markets seem to have priced in Fed tightening so they could have room for growth if the Fed ends up backing away from some of the outlined action.

There is certainly divergence in central bank mentality. For example, China and Japan were thinking about the need for more stimulus. In fact, Japan’s situation got so precarious that the Japanese Yen plummeted by 10.0% against the buck. Other Emerging Market economies have already hiked rates, South Korea and Romania more recently.

We expect some challenges this year to also play a role in how the dollar behaves. We believe that disagreements with Russia could provide the buck a boost as a safe-haven while more progress in talks with China, which lately have been friendly, would bode quite well for the rest of the globe.

EUR – Tough time with prices may force the European Central Bank to taper

A troubled euro-zone will need to confront threats to its integrity and economic growth.

Unlike in 2020, our forecast for the Euro was not close to what we had in mind. A recovering European Union managed to integrate fiscally to address needs in the continent, but even opposition to the funds being distributed had to be convinced this was the right move as a united front.
Poland and Hungary remained resolute on changing various parts of their justice systems, which was not in line with what the European Union wanted.

Less freedom of movement and some back-and-forth over reform has characterized the situation of Europe over the pandemic era.

Angela Merkel is no longer leader in Germany, a key figure that for two decades guided much of the European project and handled challenges to its unity and strength. In her absence, Germany is under the leadership of Olaf Scholz, a Social Democrat who served as Vice-Chancellor and Finance Minister.

The Bundesbank also has a change from the hawkish Jens Weidmann to a more cautious Joachim Nagel. The largest economy of the Euro-zone is experiencing a change of the guard after a long time, which also makes other countries vulnerable to change as well as a redefining of EU identity.

One development that could bring Europeans together is the current threat by Russia to take military action beyond its borders. Georgia, Ukraine, Belarus, and Kazakhstan have already been dealing with Russian influence in their politics, something that has been treated as bizarre after Russian focus primarily on domestic issues. Without trying to read what is in Russia’s mind, it seems like the country feels confident enough nowadays to stand in opposition to NATO and would like to reestablish dominance over former spheres of influence and satellite nations.

More importantly, Russia has a stronghold on the energy needs of its European neighbors as it stands as one of the world’s largest exporters of oil and natural gas. Former promises of working alongside and delivering crucial fuel to the EU’s economy have gone unkept. It seems as if Russia wants to force a different kind of arrangement that would be more beneficial.

It is possible that the United States will need to ally with European Union nations to diplomatically resolve the recent shows of Russian aggression. A conflict as we try to endure whatever COVID wants to bestow upon us would not be good for anybody. As supplies keep running into trouble, any animosity now would only further deteriorate the outlook for global growth. Everyone seems a bit on edge, but there are officials approaching the situation with calm as they look to resolve anything without violence.

On the central bank front, inflation also became worrisome in the Euro-zone as Delta and Omicron only added to a shortage of everything. European Central Bank President Christine Lagarde kept a stance of wait-and-see and concluded that the only thing the ECB would do to tighten policy was reducing the size of the PEPP (Pandemic Emergency Purchase Program). ECB Chief Economist Philip Lane agrees with Lagarde that nothing right now merits increasing interest rates in 2022.

Not everyone agrees and you have already seen other officials such as Isabel Schnabel and Luis de Guindos state that inflation is not transitory and requires at least one hike this year. Schnabel went further by saying that the desirable transition to greener energy the EU is committed to, will bring with it high inflation.

We see potential for Euro resurgence, the one that did not occur last year. There will be a summit in March, led by Macron, for all EU nations to come together and discuss a post-pandemic economic model for Europe. EU leaders are hoping to call out for major public investment and a reform of budgetary rules in order not to strangle the recovery.

Some items on the agenda also include a fairer corporate tax system and a minimum wage for the union. Further integration can only make the shared interests more likely to be achieved, which is why there is also consideration for a Strategic Alliance that would create military independence for the EU. This makes sense since the region is dealing with potential armed intervention.

Finally, the EU wants to concentrate on being tougher on the Rule of Law and look to put to rest attempts by Hungary and Poland to take away the independence of their judiciaries. Hungary will have general elections in April, as well as France.

French President Emmanuel Macron could lose his position, but European political experts feel that even if his opponent, center-right candidate Valerie Pecresse wins, it will lead to a new era of close cooperation with Germany and Italy. The Italians are looking for a new President and Prime Minister Mario Draghi is hoping to succeed 80-year-old Sergio Mattarella. Indeed, the prospects for Euro growth are there, especially if Britain tries to be a friendlier, if not closer ally after desperately looking for other trading partners and arrangements.

GBP – U.K economic performance led to a rate hike. Can 2022 handle four more?

Ongoing Brexit issues and a loss of faith in leadership could derail the pound’s rise even if there are hikes.

We are glad to have foreseen the swings for Sterling throughout 2021. The United Kingdom had to start handling of the pandemic as a non-member of the European Union, navigating through economic upheaval and the need for manufacturing vaccines for a sick world. Pound behaved as we thought with a variety of swings as the country tried to determine how much activity to allow based on the often-scary medical data at hand.

Much like the U.S., the U.K. has dealt with a labor shortage and needs to fill a gap in many jobs across various industries. There were one million unfilled jobs in November, but 600K more people standing by the sidelines than at the start of 2020.

In the U.S., a closer look at labor statistics determined that there are five million Americans not working today who were employed in January 2020. Even as wages rise, British, as well as American leadership, will need to resolve why people are leaving a variety of positions and also not taking offers.

One thing for sure that U.K. officials are eager to fix is the high level of inflation, which they have jumped ahead to try reducing via hiking interest rates. The Bank of England decided it was right to start in their last December meeting and increased its benchmark rate from 0.10% to 0.25%. For now, the BOE also plans to do four more increments this year. This course of action is in part due to forecasts that in the next few months U.K. inflation could climb another 6.0%.

When it comes to trade with the EU, the U.K. has tried to look for deals with various countries, only really reaching a solid framework with Japan. Regardless, the post-Brexit world has not been one without impediments. Both parties in Brexit negotiations failed to meet a deadline for financial equivalence, and Brussels has only agreed to temporary equivalence in two areas: derivative clearing houses and settlement of Irish securities transactions.

Regulatory alignment has not been fully achieved and London is missing out on access to the Single Market. Nevertheless, some officials argue that the U.K. is better off with autonomy and look for opportunities for trade elsewhere that can be more pragmatic than constantly bickering with the EU.

Another item dangling up in the air is the path to a resolution over the post-Brexit Northern Ireland customs agreement. In order not to have a hard border on the island of Ireland, British and EU negotiating parties agreed to a sea protocol that serves as an effective customs border down the Irish Sea.

The protocol is not popular with Downing Street, which now has a new Foreign Secretary in Liz Truss that wants to address U.K. complaints. The main issue is that free trade between Northern Ireland and the rest of Great Britain is being disrupted. Additionally, any disputes or violations have to be arbitered and decided on by the European Court of Justice. Unlike her predecessor David Frost, Truss wants the EU to ease the frustration, or she is willing to unilaterally suspend the deal. We can only hope that the need for economic revival in both areas forces progress rather than friction between the two negotiators.

As far as political stability, there are no parliamentary elections on the horizon. However, there is a chance that current Prime Minister Boris Johnson is ousted. Per the political-risk firm Eurasia Group Limited, there is a 40.0% probability that Johnson loses his power by the end of the year. Scandals that related to not following COVID safety measures and looked like preferential treatment angered even members of the Tory party. We conclude that if the BOE has to take back its promise to hike, Sterling could suffer big losses. We shall see how politics also play a bigger role.

JPY – Yen was the worst performing major currency; at its weakest since 2017

A decline of over 10.00% for JPY more than annihilated the gains experienced in 2020 as the pandemic rolled on.

Our thoughts for the Yen in 2021 were far off from the reality the country had to face. At the beginning of the pandemic, JPY found big support as Japan was considered a success in containing the pandemic’s impact on people’s lives and the economy. The country even stayed course and hosted the Summer Olympics and Paralympics in Tokyo, although without a global audience present other than media.

We believed strongly that the Yen would benefit from a flight to safety, but the complete opposite occurred. Growth in assets across the board made for one of the most interesting times in investing as stimulus funds received by people ended up making their way to the stock market and cryptocurrency. Additionally, the subsequent variants of COVID reached Japanese shores and caused the havoc experienced elsewhere.

While Japan had initially no reason to exercise any easing, it decided in the second half of the year to expand stimulus and the Bank of Japan committed to keeping interest rates below zero at (-0.10%). The negative yield is certainly not what attracts investors towards Yen, but rather the country’s ability to maintain a trade account surplus. Unfortunately, this has been reducing ever since September.

A new administration under Prime Minister Fumio Kishida is looking to add to public spending and expand the middle class. The Japanese economy is slated to grow 1.7% this year and BOJ Governor Haruhiko Kuroda has no plans to increase interest rates. Certainly, we feel that central bank divergence and this government commitment to fiscally aid will only add more pressure on the Yen. Still, it should be lesser a move than 2021.

CAD – Rising by 0.72%, ‘Loonie’ was the one major to squeeze out a gain

High rate of vaccination and higher energy prices helped CAD survive the USD rally.

Canada has been handling the pandemic better than most countries and has been a big beneficiary of the growing demand for oil as needed in the recovery globally. In a year that saw the buck return to gains, the “Loonie” was second only to the Taiwanese Dollar amongst the freely-traded, which climbed 2.25% against the dollar. Both came in less valuable than the Chinse Yuan, which was lifted to 2.7% for the year.

Bank of Canada Governor Tiff Macklem did not act in chorus with the rest of the advanced countries which implemented new lending facilities and other stimulus to counter the negativity of the pandemic. Policy divergence certainly was a main factor in the ability of CAD to avoid losses. If this hawkish mentality goes on, we do not see much that could challenge the currency’s ability to stay buoyant.

A concern over 2020 was the dramatic fall in Retail Spending, although the government had deposited cash in the accounts of citizens to be able to make it through the worst of the pandemic. The Canada Emergency Response Benefit (CERB) program was to get people to spend without fear, but instead the savings rate sky-rocketed to 27.2% in Q2 of 2020.

In 2021, these numbers were reduced in a big way and the savings rate stands at just 11.0%. Consequently, Retail Sales in Canada came back from their slump after registering (-20.6%) in April of 2020. Today the figure is positive at 1.3%.

Canada has managed to return to its pre-pandemic growth levels per GDP numbers that place September growth at 0.8% and an annualized rate of 3.8%. We feel CAD got stronger than we foresaw, and it may have room to grow.

MXN – The wild up-&-down nature continues as the country recovers

Our forecasts for MXN were accurate in 2021 as Mexico dealt with coronavirus and the central bank tightening.

In 2020, there was no other choice than to start cutting the Mexican borrowing rate, which stood as one of the highest in the world that year at 7.25%. But, much in tandem with its North American neighbors, the country started getting activity back and welcomed a resurgence in tourism in 2021 that convinced officials it was time to get back to higher interest rates. Banxico’s lowest rate was 4.25% and it has now come back to 5.5%.

One of the clearest reasons is the fact that Mexico has managed to return to better levels of growth than it had pre-pandemic. At the end of 2019, GDP faced a downturn as it reached negative territory into the (-0.73%) levels. As of now, the level of growth is at 4.5%, a yearly average that has not been kept since 2010.

Mexican President Andres Manuel Lopez Obrador (AMLO), who has mostly maintained interest in domestic affairs rather than global ones, faced his biggest challenge in mid-2021. AMLO was eager to use the pandemic to push for major reforms that could even affect the constitution.

His very high popularity convinced him that he would receive an even greater majority in Congress for the Morena Party to accomplish his goals. June saw the Peso collapse in the face of this development, but the results won seats for other opposition, thus reducing the presence of his allies. The market interpreted this as good news for MXN, which recovered quickly in July.

Earlier in January, central bankers put into doubt their ability to keep hiking interest rates after inflationary data revealed a slowdown. Since Banxico has a new chairwoman, Victoria Rodriguez Ceja, we shall see if she goes along with AMLO or if the bank is able to maintain its independence.