🌐Westpac Global FX Monthly Outlook

• Given their progress in recovery and towards their policy targets, chiefly inflation at or near 2.0%yr on a sustained basis, the path taken by the Bank of Japan is likely to deviate most from the FOMC's. Simply, there is not and will not be a reason for the Bank of Japan to pull back on policy accommodation let alone tighten policy for the foreseeable future. The ECB is next in the hierarchy of least-to-most likely to act like the FOMC. For the ECB's Governing Council, ending the extraordinary emergency asset purchases that came in response to the pandemic is an imperative. But, all the way to 2024, progress in achieving their inflation goal is unlikely to warrant an end of their standard open-ended asset purchases or a rate hike off the lower bound.
  

• The Bank of England and Bank of Canada face very different circumstances, however. The Bank of England's asset purchase program has a defined limit of GBP895bn which is fast approaching, while the Bank of Canada has already twice tapered its weekly purchases. In a very similar vein to the FOMC, both the Bank of England and Canada expect inflation to be at or near target in 2022 and beyond, warranting lift off from the lower bound.
  

• Short-end interest rate differentials are therefore expected to be a negative for Japan's Yen and the Euro, but broadly neutral for Sterling and the Canadian dollar.

• Relative growth dynamics and risk sentiment also need to be factored into our analysis. Our baseline expectation for global growth is that, of the above nations, Japan will be the weakest performer, failing to regain its pre-COVID level of GDP over the forecast period. Growth in the UK and Europe will outperform the US after underperforming in 2021, though in a level sense will remain far behind the US through to the end of the forecast period in December 2023. Canada has and will continue to perform broadly in line with the US in this recovery.
  

• Regarding risk sentiment, we expect this to favour all except the Yen over the US dollar through to mid-2022. This is because both the Yen and the US dollar are regarded as safe havens and their value as such will dwindle with global COVID-19 case numbers and consequences. The Euro is likely to benefit the most from this trend, being most exposed both to consumption in developing markets and investment across the global production chain. By mid-year 2022, this theme should have run its course though, with much of the developed world vaccinated and risks elsewhere beginning to abate.
  

• Bringing all these factors together, our forecast low for DXY has been brought up to 89.6 from 87.3 last month and forward six months to March 2022. Driving this result: instead of being little changed over the period, the Yen is expected to depreciate modestly to JPY115 at end-2023; and the Euro now peaks at USD1.23 in March 2023 instead of USD1.27 in September 2022; however, because of their stronger performance and an expectation the Bank of England will act, Sterling is still anticipated to lift to around USD1.45 in mid-to-late 2022; finally, having the benefit of momentum, policy and sentiment, Canada's dollar is seen appreciating against the US dollar to USD1.18 at the end of 2022. Thereafter, because the US will experience a stronger recovery than its DXY counterparts, an emergent US dollar uptrend through end-2023 will reverse much of the move lower to mid-2022.
  

• A final comment on Asia. This month, concerns over the spread of COVID-19’s delta variant in the region, a slowing China growth story and some lingering anxiety around geopolitical tensions have all weighed. We see these negatives as transitory, with a further move higher for key currencies such as China's Renminbi and India's Rupee into year end. Even as the DXY downtrend turns into an uptrend, the region's structural development should see Asia's gains against the US dollar persist at a measured pace. Competitiveness will impact each nation to a different degree, resulting in a more diverse array of outcomes and risks in the out years.