Inflation, Rising Rates Shaping Currency Outlook

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Luc de la Durantaye

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Luc De la Durantaye, chief investment officer CIBC Asset Management.

Well, the big dollar, as I like to call it, the U.S. dollar, its evolution will be a bit complicated in 2022 because the drivers are going in opposite directions. If you think about the monetary policy, the Fed is ahead of many, and that has provided support and could be providing more support to the U.S. dollar, at least early in the year. So from a monetary policy, it would be supported for the U.S. dollar. But as you go into the year and the fundamentals of the U.S. dollar, it’s overvalued, it has a higher inflation in the U.S. than in many other places and long term, a high inflation usually depreciates a currency. And so you have the fundamentals of the U.S. dollar that are pulling it back down. So we see a trading range up at the start of the year, but as policy evolves in 2022, we could see a peak in the U.S. dollar and retrenchment because of its overvaluation.

The Canadian dollar is interesting because initially we have the Bank of Canada that will also raise interest rates. It is also supported by progressing commodity prices, so supporting commodity prices. So we could see an early jump from the dollar to the 82 cents level. But, over time, as the global economy starts to slow, and we see commodity pricing perhaps rolling over, then maybe the peak of the Canadian dollar will be around 82 cents and we’re going to retreat towards 76 cents later on in the year as the Bank of Canada might slow down its interest rate tightening and as commodity prices roll over.

There’s been a number of currencies in Europe and in emerging markets that have depreciated in 2021, which provide attractive entry points. We see that the Russian ruble, the Brazilian real, and the Mexican peso provide very high interest rates. Their central banks have been tightening well ahead of the Federal Reserve and so they provide high carry and undervaluation, which are potentially attractive as investments for 2022. So we’re going to be monitoring these opportunities in 2022.