Fed can no longer turn the blind eye to inflation Fed can no longer turn the blind eye to inflation Fed can no longer turn the blind eye to inflation

Fed can no longer turn the blind eye to inflation

John Hardy

Head of FX Strategy

Summary:  Looking ahead to the new year, we have asked the Saxo Strats what they will be looking at in the new year. In this article, our Head of FX Strategy, John Hardy, looks at the FX market where the focus will lie in the year ahead after a 2021 that was marked by a resilient and even resurgent US dollar, a high-flying Chinese renminibi and a collapsing Japanese yen..

The most important factor for FX across the board will be how whether the US Federal Reserve is able to get ahead of the curve and whether the enormous gap from “fiscal cliff” of reduced government spending after the blowout response to the pandemic outbreak will be filled and then some by consumer spending and a new credit cycle in 2022 and beyond. The end of 2021 saw the market recovering from the omicron variant wobbles, and consensus expectations are that the Fed will hike about three times in 2022, even as longer term predictions for the Fed into 2024 and beyond are actually below the Fed’s own forecast. Ironically, the market is predicting that the Fed will never be able to get to where it says itself that it is going after at least a year of indicating the Fed was forecasting the policy rate too low.

For monetary policy next year, there is a Fed policy risk premium that can go in either direction. As noted, current pricing suggests that the market is leaning more on the risk that the Fed will fail to get anywhere near the “terminal” policy rate it has forecasted that it will reach in the coming few years even as it kicks off a hiking cycle. This market conviction could stem from a belief that the halt of Fed balance sheet expansion by mid-March and a mere few hikes will bring an over-tightening of financial conditions and trigger a massive market deleveraging that will feed back into the real economy/inflation and therefore into the Fed’s rate decisions. In such an event, the USD could remain firm even as the Fed fails to hike nearly as much as the market currently anticipates, only weakening again when the pain becomes sufficiently large to trigger a new Fed easing and new fiscal money printing.

On the other hand, if the credit cycle does kick in and growth outlook remains strong, Fed rate expectations could head higher but the Fed could soft-pedal its tightening relative to other central banks as it is concerned about spiking market volatility, leading to a weaker US dollar, one that is compounded by strong US consumer demand driving worsening trade imbalances. Either way, a smooth hiking cycle is unlikely as the Fed’s QE tapering and the fiscal cliff either short-circuit markets or the Fed remains far behind the curve.

Elsewhere, other currencies will certainly be buffeted by the above either/or setup for the US economy and financial markets, as an extension of the commodities inflation cycle further supporting the likes of CAD, NOK, and AUD in particular within G-10 currencies.

But as we survey the major currencies, there are two that really stick out for their relative moves during 2021 and that will likely demand our attention further in 2022: the Chinese renminbi and the Japanese yen. China kept a very strong renminbi policy in late 2021 even as it cracked down on property developers and major companies in the tech industry. With the Chinese economy clearly limping as we head into the New Year, the government has signaled the intention to ease, with the easing likely more forceful if the demand look is weak elsewhere and less so if commodity prices remain high and demand is strong for Chinese exports. On the flip-side, the Japanese yen suffered a huge mark-down in 2021 and could prove the single currency with the most volatility in 2022, with a very different return profile in the two scenarios we outline. If the fiscal cliff weighs and disinflation sets in, pushing yields back lower for safe haven countries, the JPY could rebound very smartly, especially if this brings a strong reversal in the Chinese renminbi, which is more likely as long as

commodity price pressures are relatively benign. The relative pricing of CNY (the CNH is the offshore version of the renminbi/yuan that is tradable outside mainland China) and the JPY is the most stretched pairing among major exchange rates.

Any way you look at it, the question marks hanging over the year to come are significant, with a huge dispersion of views among clever market observers, so the year ahead is likely bring many surprises and plenty of market volatility.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.