Credit Agricole

USD: In the near term, the USD should remain supported by the relative outperformance of the US economy that will allow the Fed to normalise policy more quickly. The USD should further benefit from its role as a liquid safe-haven currency during recurrent bouts of risk aversion. In the medium term, we expect the US economic outperformance to become less pronounced and the Fed to embark on gradual policy normalisation which could keep US real rates and yields negative. This, coupled with central bank tightening outside of the US, could encourage diversification flows out of the USD, especially given lingering concerns about the US twin deficits and the USD’s overvaluation.

EUR: The escalating Ukrainian crisis may fan the stagflation headwinds buffeting the Eurozone. The EUR's relative rate disadvantage as well as the persistent geopolitical and economic risks can discourage foreign investors from returning to the European capital markets for the foreseeable future while further worsening of the Eurozone external imbalances can reduce net demand for EUR by corporates. That said, we believe the geopolitical risks will delay rather than derail the economic recovery, keeping the ECB on the path of policy normalisation in the coming months. The EUR should become a less attractive funding currency as a result and regain some ground in H222. We remain more constructive on the EUR in the long term also because we expect it to benefit from further recovery in global growth and trade that should reduce its growth disadvantage vs the USD. Moreover, demand from Eurozone corporates and FX reserve managers could prop up the EUR.

GBP: Soaring energy costs, labour market shortages, global supply chain disruptions and persistent Brexit uncertainty may continue to plague the UK economic recovery and thus hinder any BoE policy normalisation in the face of uncomfortably high inflation. This could keep UK real rates and yields very negative and weigh on the GBP in the near term. The currency could further be vulnerable to spikes of risk aversion. In the longer term, the undervalued GBP may recover as UK growth hurdles disappear and this allows the BoE to hike rates. That said, the GBP could still be facing some idiosyncratic downside risks – ranging from Brexit to a potential indyref2.0, which will make the UK’s economic recovery less robust.

JPY: Higher oil prices, surging global yields and other G10 central banks moving to reduce stimulus mean that the yield gap between Japan and the rest of the world that existed before the pandemic has returned. Higher oil prices are more likely to push US inflation higher and the Fed towards reducing its policy stimulus while Japan’s inflation is struggling to move significantly higher even in the current environment. High oil prices also represent a negative terms of trade shock for the JPY.