Global 2022 Outlook - Still battling headwinds (Part 1)
The desk believes that the global economic recovery, while bolstered by policy support and vaccine distribution, remains uneven and presents both opportunities and risks for FX traders. Per the full note from Standard Chartered, the unevenness of recovery could lead to differentiated monetary policy responses across major economies, impacting currency valuations. Current positioning suggests a cautious approach as investors weigh these factors against potential inflationary pressures and central bank actions. As we look ahead, the upcoming economic data releases will be crucial in shaping market expectations.
What the desk is arguing
The desk posits that the global economic recovery is on a fragile path, influenced heavily by ongoing policy support and the pace of vaccine rollouts. Per the full note from Standard Chartered, this uneven recovery could create volatility in currency markets as different regions respond to economic conditions at varying rates.
Supporting this view, the note highlights that while some economies are rebounding strongly, others lag significantly, which could lead to divergent monetary policy trajectories. This is particularly relevant as central banks reassess their stances in light of inflationary pressures, with the potential for rate hikes in some jurisdictions while others maintain accommodative policies.
Where it sits in our coverage
Our consensus target for the EUR/USD is 1.075, with a range from 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns with jpmorgan, which sees a stronger euro as the recovery progresses, while it diverges from bofa, which anticipates a weaker euro against the dollar, reflecting a more cautious outlook on the recovery.
How other firms see it
Firms like jpmorgan and citi are aligned in their bullish outlook on the euro, suggesting that the recovery will support a stronger currency. Conversely, bofa holds a contrary view, expecting the euro to weaken due to persistent economic challenges in the Eurozone.
Key indicators to watch include the upcoming ECB meeting and U.S. inflation data, as these will likely influence the EUR/USD trajectory and reflect central bank policy adjustments.
What the calendar says
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Key takeaways
- 01The global economic recovery remains uneven, impacting currency valuations.
- 02Divergent monetary policies are expected as central banks respond to local conditions.
- 03Inflationary pressures could lead to rate hikes in some economies.
- 04Upcoming economic data releases will be critical for market positioning.
Market implications
Watch for the EUR/USD to test levels around 1.075 as economic data releases provide insights into recovery trajectories. Positioning signals may shift as central banks signal their policy intentions in response to inflation.
Hello, and welcome to this special podcast from Standard Chartered. I'm Manisha Tank. It's a new year, and we know that many clients and customers want to know what lies in store over the next 12 months.
Joining me to have a look at the outlook for 2022, Eric Robertson, Global Head of Research and Chief Strategist, and Edward Lee, Chief Economist, ASEAN and South Asia. Let's start with the subject that dominates dining table discussions everywhere, COVID, the disease and the restrictions around it are having an ongoing economic impact. Eric, cases in the United States have skyrocketed, and it's also been the same case in Europe as well.
So how are we going to see this phenomenon reflected in the numbers? Certainly in the early days of 2022, we are seeing a hit to economic growth and economic activity and a hit to consumer sentiment. There are some signs that Omicron will be less of a long term problem compared to some of the other COVID variations, but I do think it is still early days.
Over the more medium term, I think it's very consistent with our economic outlook for the year, which is of two steps forward and one step back. For tourism dependent economies, things like Omicron have forced a reevaluation of how quickly they can reopen their domestic economies to foreign travelers. But over the course of 2022, we do expect that the path of travel on net is going to be positive.
And as Omicron is dealt with, hopefully successfully, we are expecting a more positive economic outlook in 2022. Edward, across Asia, and let's begin with China, what are you expecting for this coming year? Starting with China, if we are talking about the growth headline, it's going to slow.
But we are talking about slowing of growth from 8% to 5%. And do not forget at 5%, we are pretty much running at potential growth for China. There's been a lot of focus in terms of growth concerns with the regulatory crackdowns, some energy shortage, some of the earlier monetary policy tightening.
At the moment, governments are clearly applying a more flexible approach. We have already seen them cut rates and probably they are going to be a bit looser on the fiscal side, focusing on infrastructure. And given that it's an important year, party congress sometime in the autumn, probably we should see China trying to keep growth above 5%.
In terms of headline numbers, we do expect ASEAN to do better this year. Say ASEAN's 6th growth at about 5.2%, last year 3.4%. But here we must take note that it's partly of the starting point.
Last year ASEAN underperformed due to the delta wave, largely in Q3. And compared to where ASEAN's potential growth is, I would say somewhere between 5% to 5.5%. It's really for ASEAN to be the region that's playing catch up to the rest of the world, especially in the major economies in 2022.
Why is it that your expectations for ASEAN are so positive? A few key reasons. One is starting point.
I think second is in terms of vaccination. A few countries are still not at herd immunity levels, Indonesia, Philippines, closer at about 50%. But looking at the pace, probably they'll reach it in about first half of the year.
So that the vaccination status, better health capacity, probably gives us better confidence in that sense. On the fiscal side, ASEAN is joining the world in terms of funds, some fiscal consolidation. I think in terms of broad numbers, we are still looking at fiscal deficits, 1.5% to 5% point larger than pre-COVID levels.
In that sense, it's still somewhat expansionary versus pre-COVID policy support. And I do expect monetary policies to still remain very supportive, at least in the first half. The other thing I feel going for ASEAN is FDI.
Despite last year still being a very challenging COVID year, we saw FDI running faster than pre-COVID levels. This goes back to the point where ASEAN has been receiving more global FDI from the days when China got more expensive, from the days of US-China trade war, and adding now to this supply chain disruptions. And ASEAN is now getting these investments, looking for alternative production sites over medium term.
This will probably help ASEAN in terms of investment activity. Eric, what I'm hearing is there is a movement to the value of ASEAN. What's your view on that?
This idea of value is really important. Coming into 2022, we know there are lingering risks for emerging markets and Asia in particular. And those lingering risks include COVID.
They include supply chain disruptions. They include the prospect of central bank rate hikes around the world. And all of that put together might lead you to be rather pessimistic about emerging markets.
But our view is that a lot of this negativity is in many ways already reflected in a number of financial market prices. As an example, emerging market equities trade at a 45% valuation discount to the S&P. And we can cite a number of examples like that, where emerging markets have been heavily discounted.
Now, perhaps for the right reasons, but the magnitude of that discount strikes us as extreme. We do think there actually are some potentially really interesting opportunities in places like ASEAN. I think you can make a case that if China were to deliver to our forecast a 5.3% GDP this year, that might actually represent an upside surprise relative to market expectations.
This idea of value and unrecognised opportunity will be an important one for EM in 2022. Last year, Eric, we talked about US exceptionalism. Has it crept back and how is it affecting the outlook?
I think it has crept back. If you look at US equity outperformance relative to EM or even the rest of developed markets, it was fairly spectacular in 2021. We are coming into 2022 with extreme confidence in the marketplace that US interest rates are headed dramatically higher because the Federal Reserve is going to commence a fairly significant rate hiking cycle.
And all along with that, we have expectations for a stronger US dollar. I think exceptionalism is a term that has crept back into market discussions. We're a bit skeptical of that narrative and it's partially because we think that perhaps the optimism on the US is a bit overdone, not because we're negative on the US outlook, but because we think it may be more balanced than what the market is discussing.
And again, when it comes to this idea of exceptionalism, especially in things like foreign exchange, it ignores the rest of the world's opportunity set. And I think as we come into the meat of 2022, we will see that perhaps inflation is not as much of a threat as people were worried about in the early days of the year. We will see that the growth prospects for a number of emerging economies may actually be a little bit better than feared.
Now, that's not saying the US is headed for recession. It's just saying that perhaps the exceptionalism narrative that is being discussed is a bit overplayed at the moment. Well, that's all incredibly insightful.
Thank you to Eric and Edward. Coming up in part two, we're going to delve a little bit deeper then into the inflation question. And we're also going to find out what's growing, what's hot for 2022.
I'm Anita Tank. Thank you and goodbye.
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