With only a few days left in 2022, it is time to look ahead to some possible themes to watch in the next year, as well as our usual round of outlandish predictions for 2023. But first, let’s revisit some of our brief thoughts on 2022 and see how they played out.
In last year’s “Quick and Wacky Predictions for 2022“, we said that “inflation and pandemic issues will likely remain top trading themes for playas in any market to watch in the first half of 2022” and that USD and CAD will likely lead the FX majors due to their relative strength in recovery. We also said that due to relatively weak economies and pandemic conditions, the EUR and JPY would fall behind.
The first half of 2022 didn’t play out exactly as we guessed, but the outcome was generally inline as the U.S. dollar and Canadian dollar were the top performing major currencies, while the Japanese yen was the worst.
Actually, the outcome was much better than expected as the Federal Reserve and Bank of Canada’s much earlier move into rate hike mode in March 2022 vs. the European Central Bank and Bank of Japan’s late tightening action sparked MASSIVE forex moves this year, as well as big moves in bond yields.
Probably the biggest FX surprise in 2022 was the strong performance in the Swiss Franc after the Swiss National Bank began its hiking cycle. After years of effort by the SNB to keep the franc weak, it’s probably actually no surprise that the Swiss franc would outperform the majors in the second half of the year!
Congrats if you were able to catch even a piece of these gigantic moves, but what should be on our radars for 2023?
More Risk Aversion Vibes Ahead?
As we roll into the new year, we’re starting to see the universal effort of central banks to combat high inflation beginning to bare fruit as recent inflation updates have shown signs of potentially peaking. And as expected, those efforts are leading to the unfortunate side effect of slowing economic activity.
A global recession in 2023 has been growing to be the likely base case in the trading community, especially in December after several major central banks confirmed that policy tightening is likely to run through 2023 to make sure high inflation does not become a long-term problem.
Let’s also remember that while interest rates have accelerated higher in 2022 (and possibly not too far away from their peaks), not all of the major central banks have begun unwinding the massive bond positions (i.e., quantitative tightening) accumulated over the past decade to support their respective countries. Only the Bank of England and Federal Reserve have begun the process, with the European Central Bank set to begin unwinding its €5 trillion balance sheet in March.
And forex traders were recently hit with a surprise move by the Bank of Japan just this month (raising the cap on 10-year Japanese government bonds), which many are taking as a baby step away from exiting their ultra-stimulative monetary policy.
With odds pointing towards much tighter credit and liquidity conditions, the outlook looks pretty bearish on risk assets for now. This shouldn’t be much of a surprise given that the extremely easy monetary policy conditions since the 2008 global financial crisis sparked gains in the multiples for risk assets. So, why wouldn’t we see the opposite when the easy money is taken away?
Barring a major change in inflation data (i.e., a quick move into deflationary conditions), a very negative shift in employment conditions, and/or a negative black swan event, it’s very likely central banks will continue to stay hawkish and risk assets will remain under pressure as they have been in 2022. But the sea of red in risk assets may be a lot less in 2023 given the amount of pain traders felt in 2022.
Employment data will likely take the top spot as the thing to watch given the surprise strength in the data, which was likely the recent insight that’s been keeping the central banks in full on tightening mode recently.
With that extremely high level macro overview of what we may see in the first half of 2023, we think that currencies of central banks that went into tightening mode early may under perform those that didn’t begin until later.
That potentially means the EUR and CHF may continue to outperform in H1 2023, with the JPY as a darkhorse candidate for taking the top spot IF the Bank of Japan officially begins tightening monetary policy.
But it’s likely we won’t see the massive moves we saw in 2022 repeat in 2023, at least not without a major surprise catalyst and/or shift in the economic landscape. The major central banks will once again be coordinated, this time in monetary policy tightening, so policy divergence is likely to be less of a driver this year.
Now, that’s not to say policy divergence scenarios are out of the question. There’s a possibility that if economic conditions worsen further, some central banks may begin slowing or pausing monetary policy tightening, creating monetary policy divergence setups in the FX market. This scenario was actually discussed in our watchlist post: Is AUD/JPY the Pair to Watch for H1 2023?!
With all of that said, the range of potential scenarios in 2023 is extremely wide given that there are still plenty of current X-factors like the war in Ukraine, China’s continued problems with COVID, and the uncertainty of how deep a global slowdown can be.
The macro forecast for 2023 is still pretty muddy so don’t get too confident with one outlook or another. These are all events that have the ability to shift dramatically in a short period of time so manage risk accordingly!
Quick and Wacky Predictions:
With everything discussed above, the obvious “Wacky” Prediction would be that the Fed will cut its interest rates in 2023.
After raising interest rates two more times, Chairman Powell and his team will declare that “it looks terminal-y enough” and start bringing interest rates lower. The “data” that will actually lead the data-dependent decision won’t be the U.S. employment or inflation figures…but a surprise relaxation to the FOMC Board’s “conflict of interest” rules.
Twitter Becomes the World’s No. 1 Social Media Platform
The Twitter takeover saga was one of the more suspenseful dramas that unfolded this year, as most tweeps got extra sentimental anticipating its almost-but-not-quite demise. Social media supremacy will still be up for grabs in 2023, but we just might see Twitter rise to become the one platform to rule them all as Elon Musk does his thing once again.
Crypto assets will be less volatile than fiat currencies
In 2022, the U.S. Dollar Index (DXY) saw a 9.07% average weekly change in its prices while the Crypto Volatility Index’s (CVI) average weekly price change was 9.31%. What happened to crypto being the far-and-away the most volatile asset class around?
Sure, it was an extraordinary year for USD, but with China potentially reopening, the U.S. seeing a recession and the war in Ukraine ongoing, the Dollar (and likely other fiat currencies) won’t lack catalysts.
Meanwhile, FTX’s downfall is probably a peak in crypto space mega drama. JPMorgan Chase & Co has registered a trademark for cryptocurrency wallets and Sen. Elizabeth Warren is pushing a bill to crack down on crypto money laundering. Increased regulations and the arrival of more trusted financial entities could encourage more liquidity and less volatility for cryptocurrencies…or not.
Hollywood jobs will be one of the first major industries disrupted by Artificial Intelligence.
Writers will struggle to create original hit ideas for movies and shows, so Hollywood execs turn to AI as a solution. AI’s big strategy in 2023 will be to recycle big-name actors in the same cinematic universe. Paul Rudd as Spiderman? Dwayne Johnson as the new Hulk? Tom Cruise as Iron Man? Sure, why not?!
On top of that, Hollywood companies make massive profits as movies and shows are 100% generated with AI, saving it billions in production costs and movie star acting fees. Disney’s stock becomes the best performing asset in 2023 thanks to AI!
And that’s it! These are some of our wild and utterly ludicrous forecasts for 2023; we’d love to hear yours! Please share your ideas with us in the comments section below…good luck!
