Investors tend to neglect currencies. Either they omit to trade them to earn returns, or they ignore the impact on their international investments. For example, over the past year, a USD-based investor would have made 24% by investing in Japanese equities. Yet the yen-based return was 29% – a difference of 5%.
What happened? The yen weakened against the dollar, so the USD-based investor holding a yen-asset suffered a currency loss. Had they hedged their yen exposure by selling yen and buying dollars in the FX markets, they could have captured the extra 5%.
So where are the big currency moves likely to occur in 2022? Focusing on DM and selected EM markets, we find the consensus of FX analysts forecasting the largest gains by the end of 2022 for the Korean won, Australian dollar and Russian ruble (Chart 1, orange bars). The analysts expect their gains to range from 3.5% to 5.5%. Meanwhile, the South African rand, Brazilian real and Mexican peso are forecast the largest declines – between 3% and 5%. Investors with exposure to these markets should therefore consider hedging it.
Moreover, we can examine what FX markets are pricing for the end of 2022. FX forward markets reveal the Brazilian real, Russian ruble, Mexican peso, South African rand and Indian rupee are priced to decline by between 5% and 10% (Chart 1, blue bars). The biggest difference from consensus is Russia: analysts are expecting strength, while forwards are pricing declines.
But the general message is that analysts expect dollar weakness in 2022. Dollar-based investors with international exposure could therefore get additional gains through foreign currency appreciation. For FX investors, markets with large divergences between consensus and forwards offer the potential for attractive carry-related gains. These markets include Russia, Korea and Australia.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.