Author: Zhou Ailin
The dollar index is off to a good start in 2023, rising 1% to around 104.5.
The U.S. dollar index has risen for most of 2022, rising from 94.63 on January 14 to a high of 114.78 on September 28.
The fourth quarter retreated to a point just above the 50% gain for the year to close at 103.49.
For the whole year of 2022, the RMB will depreciate by 7.86% against the US dollar, ranking in the middle among major Asian currencies.
According to interviews and observations by reporters from China Business News, institutions predict that the RMB will strengthen in 2023, and some more optimistic institutions put the forecast point around 6.7~6.8.
For example, Barclays and Guotai Junan International believe that the target price of USD/CNY is 6.7 by the end of 2023.
As of 18:35 on January 4, Beijing time, the U.S. dollar index fell back to 103.76, and the U.S. dollar/offshore yuan was at 6.88.
Strong dollar draws to a close
Although major institutions predict that the Federal Reserve will raise interest rates at least 2 to 3 times in 2023, each time 25BP, but compared with the annual rate hike rate of 400BP in 2022, it can be said that the current tightening policy of the Federal Reserve is coming to an end.
"The overall weakness in the U.S. dollar will continue until at least the first half of 2023. As the Bank of Japan may unexpectedly accelerate policy tightening, the downside risks to the U.S. dollar have intensified," said Zhou Hao, chief economist at Guotai Junan International.
The U.S. dollar index broke through the 114 mark in 2022, and on November 10, as the U.S. CPI data was much weaker than expected, the U.S. dollar index fell from 110.30 to 106.28 at the end of November.
Since then, the index has formed a downward channel until the end of the year.
"On the first trading day of 2023, the U.S. dollar index broke through the downtrend line of the channel and returned above the 50% retracement level of 104.70. Whether the U.S. dollar will continue to rise in 2023 has attracted much attention." Senior analyst of Jiaqiang Group Teacher Jerry Zhang told reporters.
At present, more opinions tend to believe that the strong dollar is coming to an end.
He said that according to the "dollar smile theory", the dollar will strengthen during periods of high risk aversion and a strong U.S. economy, while a cycle of weak economic performance (interest rates peak and the Fed begins to cut interest rates) will drag down the dollar.
"We may be experiencing the latter. Even Stephen Jen, who proposed the theory, believes that 2023 is suitable for shorting the dollar. Judging from the weekly chart of the US dollar index, around 103.30 will become a key watershed, and a break below this point will mean As the upward trend that began in May 2021 is broken, the index may fall to the lower track of the 12-year upward channel." Jerry Zhang said.
Risky currencies such as sterling, the euro and some emerging market currencies rallied as U.S. inflation data cooled for two consecutive months.
Since December last year, international investment banks have raised their forecasts for the euro, pound sterling and other currencies against the dollar.
For example, Barclays raised its EUR/USD forecast to 1.12 by the end of 2023 (the euro once fell below 1:1 parity against the U.S. dollar in 2022), and GBP/USD to 1.29 (the pound also fell below parity against the U.S. dollar in 2022).
UBS also recently raised its EUR/USD forecasts for March, June, September and December 2023 to 1.02, 1.05, 1.07 and 1.1, from 0.96, 0.98, 1 and 1.04 respectively.
Inflation in the euro zone has surpassed that of the United States, and signs of cooling are mild. The agency believes that the euro may now give up some recent gains, but as the cycle develops and the European Central Bank demonstrates its ability to control inflation, the euro is expected to gradually rebound in 2023.
UBS also raised its forecast for GBP/USD in March, June, September and December next year to 1.16, 1.21, 1.24 and 1.3, from 1.1, 1.13, 1.16 and 1.21 respectively.
The pound rallied strongly after British Prime Minister Rishi Sunak took office.
Sterling has now reflected the economic problems of the past many years, and once domestic and global growth normalizes further, institutions believe that the potential for a rebound in the pound from current levels is quite strong.
Do not rule out the dollar's short-term counterattack
Although it is generally believed that the U.S. dollar will weaken in the long term, it does not rule out a short-term rebound. For example, the U.S. dollar index will be quite strong in the first year of 2023.
"The weakening of the US dollar, combined with the recovery of US stocks and the decline in US bond yields, the market seems to be planning for the end of the US interest rate hike cycle, and even prepares for a rate cut in the second half of 2023. But in the short term, we remain cautious on further depreciation of the US dollar , The main reason is that the current interest rate level in the United States is still very attractive, and the recent trend of the dollar is mainly driven by capital flows. Due to the high risk of global economic growth, the dollar is supported. We think the market is too optimistic about the Fed's work to suppress inflation. ” said UBS.
In addition, institutions believe that the strong appreciation of the U.S. dollar in recent years has been driven by relatively high nominal and real yields. As U.S. inflation slows and real interest rates rise, inflation may be lower than interest rates, which should be beneficial to the U.S. dollar.
In fact, the US 10-year Treasury yield is still higher than the rest of the G10 countries (except New Zealand).
At the same time, in the short term, foreign exchange market positions and momentum also support a stronger dollar.
With the strengthening of the euro's rebound momentum, many short-term investors have quickly changed the US dollar long (euro short) into the layout of the euro long (dollar short), but now it seems a little excessive, and it is not difficult to trigger traders' reversal actions, which will also drive The dollar rebounded in the short term.
What is more noteworthy is the lingering downside risks to the global economy.
The current rate hike cycle has suppressed inflation while weakening the outlook for the global economy.
Many economists expect a mild recession in 2023, but this has supported the dollar, because the slowdown in economic activity will hurt other G10 countries more.
"Having said that, we believe the dollar will weaken over the long term." UBS said that because the Fed started the interest rate hike cycle earlier, it may also become one of the first central banks to start cutting interest rates. Weakness is generally bad for currencies.
Other major currencies have underperformed the dollar in the past few years, but this trend is unlikely to last for long.
Risks such as the conflict between Russia and Ukraine or energy shortages in Europe will eventually subside, and the global economy is expected to resume growth in the second half of 2023 and 2024, which will support the euro, pound sterling and the currencies of major Asian exporters.
The reopening of China and Japan has also had a positive effect on global growth, and a better growth outlook outside the U.S. tends to be bearish for the dollar.
The yuan is expected to continue to rebound
In 2022, international institutions will adjust the forecast point of the RMB again and again (in the direction of depreciation), and the forecast point of 7.5 or even 7.8 is not uncommon.
However, the consensus in 2023 is that the renminbi will sweep away the gloom and continue to stabilize and rise.
As China announced the implementation of "Class B and B Regulations" for the new coronavirus infection from January 8, the expectation of economic recovery is constantly increasing, and the recovery of fundamentals will allow the re-inflow of international funds to be expected to support the appreciation of the renminbi.
Gao Ting, Chief Strategy Analyst of Nomura Orient International Securities Research Department, told reporters that the Fed’s rapid interest rate hike has entered the late stage, and the stage of sharp appreciation of the US dollar has also passed, which is beneficial to emerging markets, and funds may return to emerging markets in 2023 .
Meanwhile, the possibility of a U.S. recession has international investors looking for investment opportunities in other areas.
"We judge that China's economic recovery in 2023, especially after the second quarter, will become more obvious. The inflow of northbound funds may increase compared with 2022, and foreign capital is expected to become an additional liquidity highlight throughout the year." Gao Ting said.
However, due to rising recession expectations overseas, China’s exports may face a sharp slowdown in 2023, resulting in the disappearance of the large current account surplus in the past two years. Will the lack of this part of “real money” affect the RMB?
Zhou Hao told reporters: "Although there will be a huge surplus in 2022, it does not seem to help the appreciation of the renminbi. In 2023, the current account may return to a normal level."
Zhou Hao predicts that the RMB will strengthen in the coming year.
“Our base case is that USD/CNY will hit 6.8, and if economic indicators are stronger than expected, the possibility of further appreciation cannot be underestimated (6.7 for the full year of 2023).”
"We believe that 6.8 will not become an obstacle for the dollar against the renminbi." He said that the most important driver of the renminbi actually comes from the domestic side.
The Chinese economy will usher in a strong recovery in 2023, with a full reopening in sight.
At the same time, the policy tone has become less hesitant in supporting growth, focusing instead on domestic consumption.
Barclays said that the process of reopening will inevitably have a negative impact on China's balance of payments, but the renminbi will still rebound against the US dollar with a high probability, but it may be less than the currencies of other developed countries.
In addition, China's economic recovery should boost high-beta currencies in the Asia-Pacific region, such as the South Korean won, the tourism-dependent Thai baht and the Malaysian ringgit.