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Dec 17, 2021

In this video, Portfolio Manager Dan Mitchell looks at recent fluctuations in currency markets as central banks scale back their stimulus. In this environment, he reviews which currencies are likely to outperform.

Watch time: 2 minutes 13 seconds | Hover your cursor over the menu icon to see chapter options

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What's behind recent volatility in currency markets?

Currency markets have been unusually quiet for most of 2021, with trading ranges that are about half of what you’d expect at this time of year.

That changed in November. We’ve started to see a little bit more excitement in foreign exchange. And it’s not just the emerging market currencies, but also the world’s major developed market currencies that have seen increased volatility.

Those added fluctuations are in part because of the new COVID variant that’s introduced some uncertainty into all financial markets. But really, the big driver of foreign exchange volatility has been the fact that central banks are starting to take away some of the stimulus that they had provided through much of the pandemic. The Fed, for instance, has started to reduce the asset purchases that it conducts every month. And the U.S. dollar is rallying on prospects for higher interest rates in the U.S. next year.

Markets right now have three rate hikes priced in for 2022, and we think that might be a little bit too optimistic. So, we’re looking for the U.S. dollar to give back some of its recent gains next year and for some of these other currencies to reclaim some of their lost ground.

We generally expect that it’s the cyclical currencies, the emerging market ones, that will outperform the low-yielding funders like the euro and the yen next year. And the Canadian dollar is one of those cyclical currencies. And it has room to strengthen, we think, particularly from current levels where it’s trading at the cheaper end of the 2021 range. Things like the rallying crude prices or the strong employment gains in Canada and a relatively hawkish central bank should support the currency next year and have it outperform most of the other G10 currencies.

We’ve got a forecast of 1.17 for next year, and that translates into roughly an 8.5% gain.

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Publication date: (December 2021)