Currency Volatility: Will a Strong US Dollar Return? (From JPMorgan) [3 Finance News Articles]
~ Friday, February 17, 2023 Blog Post ~
Will we see the return of a strong dollar in 2023, and what’s in store for currency markets around the world?
February 3, 2023
- The U.S. dollar appreciated over 12% in 2022, hitting a two-decade high in September 2022, but has trended weaker since.
- Forecasts for the dollar in 2023 across currency pairs are more related to country-specific drivers, and J.P. Morgan Research is currently broadly neutral on the dollar, focusing instead on regional growth rotation trends away from the U.S.
- As for other major currencies, J.P. Morgan Research is bullish on the yen, neutral on the euro and bearish on the pound in 2023.
2022 was a historic year. The U.S. dollar strengthened against nearly every other major currency to levels not seen in decades, as the Federal Reserve (Fed) aggressively hiked interest rates in a bid to combat inflation. On the whole, the nominal broad dollar index — which is used to measure the value of the dollar against a basket of currencies widely used in international trade — appreciated over 12% in 2022.
However, the greenback has trended weaker since, sending ripples through currency markets around the world. Against this backdrop of heightened forex volatility, what’s the outlook for the U.S. dollar, British pound, euro and Japanese yen in 2023?
The 2023 Outlook for Major Currency Pairs
The Outlook for the US Dollar
After a historic bull run last year, the nominal broad dollar index fell almost 7% between November 2022 and January 2023. Such weakness reflects a mean reversion from the dollar’s outsized gains in 2022.
“The confluence of factors that had proved so supportive of the dollar earlier in 2022 has since inverted. Markets are now aggressively pricing Fed easing on the back of growing signs of disinflation, while the outlook for global growth this year is no longer looking as pessimistic as it did earlier in 2022,” said Meera Chandan, Global FX Strategist at J.P. Morgan.
Overall, while J.P. Morgan Research still forecasts modest dollar strength in 2023, it is taking a neutral stance on the USD. “We still hold longer-term reservations about the broader trajectory of the global cycle, which we think should be generally dollar-positive, but the interim period of both positive global surprises and less U.S. exceptionalism seems to point toward a period at the trough of the dollar smile, whose duration is uncertain,” said Chandan. “In our view, the top trading themes for 2023 are regional growth rotation away from the U.S., at least temporarily toward China, and greater differentiation with high beta FX.”
The Outlook for the Euro
In 2022, the euro weakened as much as 17% versus the dollar intra-year, plunging below parity for the first time in two decades in July. However, lower gas prices and positive growth momentum in the region are expected to boost the euro’s fortunes in 2023.
Back in November 2022, J.P. Morgan Research took a dim view of the euro, with euro/dollar forecast to hover around 0.95–1.00 in 2023. A few months on, each of the motivating factors for this downbeat view has been challenged, if not reversed outright. Title Transfer Facility (TTF) gas prices, the key benchmark for gas prices in Europe, have collapsed to pre-invasion lows as the continent experiences the warmest weather on record. This sharp fall in gas and electricity prices benefits the economy overall and should mean the region can avoid the harsh recession that was expected. In light of these developments, J.P. Morgan Research expects euro/dollar to approach 1.10 in March 2023, before declining to 1.08 in September 2023.
“Energy dependence and geopolitical risks will be a theme for the region for years to come and simmering U.S. recession risks still pose a threat to growth trade. Also, the Fed might have to deliver more rate hikes, resulting in further ECB tightening,” noted Chandan. “As such, even though we think near-term growth momentum suggests 1.10 could be broken, we do not yet pencil larger gains for the second half of 2023.”
The Outlook for the British Pound
Similar to other major currencies against the U.S. dollar, the sterling is being battered, tumbling to record lows in September 2022 after the Truss administration announced a series of tax cuts. While a new prime minister has since taken over, J.P. Morgan Research remains bearish on the pound.
While sterling has strengthened meaningfully versus the dollar in recent weeks, it was also the second worst performing currency in the G10 — a group of 11 industrial countries that meet on an annual basis to discuss economic and financial matters — versus the dollar through the turn of the year. “Markets are still pricing the pound as an underperformer and we think that should continue,” said Patrick Locke, Global FX Strategist at J.P. Morgan.
Looking ahead, J.P. Morgan Research projects broad underperformance for the pound in 2023, with sterling/dollar forecast to reach 1.20 in March 2023, before falling to 1.18 in June 2023, to 1.16 in September 2023 and to 1.15 in December 2023. “There are still very solid reasons to see sterling as a relative underperformer in the G10 space. Stagflationary dynamics remain, growth risks from the U.S. are relevant, housing market weakness might just be getting started, consumers are struggling with negative real wage growth, and the labor market is facing a lose-lose scenario,” noted Locke. “Although the U.K. has some exposure to the drivers of better European growth, namely lower gas prices, it is also perhaps less primed to benefit from this given lower trade intensity with the continent post-Brexit.”
The Outlook for the Japanese Yen
The dollar/yen pair breached 150 in October 2022, marking a 32-year low. This was largely due to Japan’s yawning trade deficit and the Bank of Japan’s (BoJ) dovish stance. While the Japanese yen closed out 2022 almost 18% down versus the dollar, J.P. Morgan Research has been expecting it to strengthen in 2023.
“A decline in long-end U.S. yields and a peaking out in terminal rate expectations into 2023, alongside the risk of a moderate U.S. recession, should clear the runway for a lower repricing of the dollar/yen pair in 2023,” said Benjamin Shatil, Head of Japan FX Research at J.P. Morgan. In addition, the BoJ shocked markets in December by relaxing its yield curve control (YCC) policy of pinning yields close to zero. This move was in line with the J.P. Morgan Research view, but the timing was earlier than expected. The central bank announced it would allow 10-year Japanese yields to climb as high as 0.5 percent, compared with 0.25 percent previously. The yen strengthened against the dollar after the news.
“What has changed for the yen has been the earlier-than-expected BoJ pivot. Our baseline macro view now looks for a further relaxation of YCC later this year, which would form an additional bullish tailwind for the yen,” said Shatil.
Though this would mark a major change for BoJ policy, other tweaks may also prove supportive for the currency. These include a further revision higher of the central bank’s core CPI forecasts and a change to the extant forward guidance (official communication that signals to the public the likely future path of monetary policy). All in all, J.P. Morgan Research expects the dollar/yen pair to trade at 128 by December 2023.
Sources:
https://www.jpmorgan.com/insights/research/currency-volatility-dollar-strength
https://twitter.com/jpmorgan/status/1626267680792797185/
Article #2: Troubling signs emerge as credit card debt hits record high (From Yahoo! Finance)
By Gabriella Cruz-Martinez, February 17, 2023
As credit card debt hit an all-time high — just shy of $1 trillion — in the final three months of 2022, delinquencies among borrowers accelerated.
Balances grew $61 billion in the fourth quarter from the previous one to $986 billion, the Federal Reserve Bank of New York found. That marked the largest quarterly increase and the highest total since the series began in 1999.
At the same time, the rate at which credit card holders missed payments and became more than 90 days behind was higher than before the pandemic, especially among younger borrowers, a potentially worrying sign when the student loan pause lifts later this year.
“Although historically low unemployment has kept consumer’s financial footing generally strong, stubbornly high prices and climbing interest rates may be testing some borrowers’ ability to repay their debts,” Wilbert van der Klaauw, an economic research advisor at the New York Fed, said in a statement.
The $130 billion year-over-year increase in credit card debt, also the highest annual gain on record per the New York Fed, came as interest rates on credit cards also hit new highs.
The average rate is near 20%, according to Bankrate, surpassing levels from the last 37 years. Credit card rates move in lockstep with the federal funds rate, the benchmark rate the Federal Reserve has been hiking aggressively to stave off runaway inflation.
Higher consumer prices is another culprit behind rising credit card balances, the researchers said, noting the pace of inflation reached a 40-year high last summer.
“Americans have been facing higher prices everywhere…including on purchases they may be putting on their credit cards — at the grocery store, at the gas pump, and for many other types of goods,” the researchers wrote in a blog post accompanying the report. “It is possible that increasing prices — and correspondingly, debt service payments — are cutting into borrowers’ balance sheets and making it more difficult for them to make ends meet.”
The report also showed that more auto loan borrowers are having trouble keeping up with their monthly payments, again especially among younger borrowers. Higher interest rates largely can’t be blamed for this increase because most auto loans have fixed rates, the researchers noted. The monthly payments of newer loans, though, are higher, reflecting the run-up in car prices during the pandemic.
The researchers noted that the rise in delinquency levels for both credit cards and auto loans could simply be a “reversion to pre-pandemic” norms now that much of the unprecedented level of government support has run out.
“This leaves us with a critical question though — will these delinquency rates continue to rise, or will they flatten out now?” the researchers wrote.
A lingering concern, they noted, is the ending of the student loan payment pause at the end of June. Younger borrowers, who were more likely last quarter to struggle with making payments, are also more likely to have benefited from the student loan forbearance. What happens when those payments start back up, especially if the Supreme Court overturns President Joe Biden’s loan forgiveness?
“There’s no question that the student loan moratorium has been a big deal and has allowed them to really knock down a lot of credit card debt,” Matt Schulz, chief credit analyst for LendingTree, previously told Yahoo Finance. “It’s definitely troubling to think what’s going to happen to delinquency rates once everybody has to start making student loan payments again.”
Sources & References:
Article #3: Citigroup senior executive and dealmaker Verme dies (From The Financial Times)
By Arash Massoudi and Ivan Levingston in London, February 16, 2023
Banker was a rainmaker with close ties to prince Alwaleed bin Talal and Roman Abramovich
Alberto Verme, a top Citigroup investment banker whose clients ranged from Saudi prince Alwaleed bin Talal to Russian oligarch Roman Abramovich, died on Wednesday at the age of 65.
The Peruvian banker, who ascended to the top ranks of Citigroup over a near three-decade-long career, developed a reputation as a rainmaker who could woo senior clients in any geography and as an inspirational leader inside the US bank.
Citi’s chief executive Jane Fraser said in a note to employees on Thursday that Verme, who was based in London, was “a true titan of our industry and a selfless mentor to many of us”.
“Alberto was made for this business. There was no one better at developing client relationships,” Fraser added.
Verme joined Salomon Brothers in 1994, and played a key role in its integration with Citi after the two firms merged in 1998. He had started his career at the World Bank before stints at German industrial conglomerate Metallgesellschaft and First Boston.
Best known for his work as a banker to energy and utility companies, he went on to lead global investment banking at Citi, and also served as head of Europe, Middle East and Africa.
In 2008, he moved from London to Dubai, where he built close ties with Prince Alwaleed and his Kingdom Holding Company, according to people who knew Verme.
There Verme also developed relationships with Abu Dhabi’s Mubadala Investment Company sovereign wealth fund and the Abu Dhabi National Oil Company.
“Alberto was a gracious, highly respected leader, who uniquely embraced global opportunities,” said banker Michael Klein, who is set to become the chief executive of CS First Boston and worked closely with Verme at Citigroup until leaving the bank in 2008.
Since 2011, Verme was global chair of institutional clients group, a unit tasked with serving Citi’s top institutional and private banking clients.
Before Russia’s invasion of Ukraine last year, he was close with Abramovich and also managed Citi’s relationship with Russian energy firm Rosneft, according to the people.
Verme, say those close to him, was a popular banker, known for his support of the football teams Alianza Lima and Atlético de Madrid and ending his emails with the phrase “Onwards!”
“Alberto was among the greatest client bankers ever and in a world of large and complex personalities, he was a great guy,” said Manuel Falcó, global co-head of banking, capital markets & advisory at Citi.
Verme had been battling cancer, according to friends and colleagues. He is survived by his wife and three children.
Copyright The Financial Times Limited 2023. All rights reserved.
Source:
https://www.ft.com/content/9f1111bd-a80e-4ae2-b2c7-e103bef5db88
