As we move into the final month of a prosperous 2022, myself and the execution desk here at West Water Associates will be keeping clients updated on our December FX positioning.
As we approach the year-end, we look at one last push upwards from the USD, before a more speculative and challenging 2023.
At this moment in time, Risk appetite remains at the core of the USD’s fortunes. The strong rally in US equities since the 13th of October when a higher than expected US CPI print failed to provoke a lasting “risk off” appetite has been undermined by the subsequent month’s outcome for core CPI. This has been echoed in a justifiably weaker USD. The challenge is what might provoke even greater USD weakness from here, given the shift has already been sizable. However, the recent fall in the USD in my opinion seems excessive, especially given the FED is still very much hawkish and the growing global growth concerns.
The FX market will most likely be determined by the FOMC meeting on the 14th of December, and the data ahead of that meeting, which may shape the tone delivered alongside a likely 50BP hike. Given the pronounced drop in the USD of late, we think that the balance of risks favours USD upside in the coming weeks. Any renewed emphasis from the FED that rates may need to stay higher for longer could unravel the recent bounce in risk appetite and set USD bulls up for a nice end to the year.
There are a number of setups to offer the flipside to our USD into the year end. We have chosen the CHF as I believe the domestic backdrop will struggle to justify the degree of rate hikes priced in. The SNB may hike by 50BP rather than 75BP and offer less hawkish guidance than others, given inflation may have peaked. The CHF’s “safe haven” appeal may diminish as Europe’s data are not proving as disappointing as before, and USD/CHF offers better carry than participating in EUR/CHF upside.