Insights

Currency Market Commentary, December


Summary of Views

Detailed Currency Views

Macro Environment

Currencies, rates, and equity markets traded sideways during the first few weeks of the month. After December 20 omicron optimism overcame high inflation and a continued transition toward tighter monetary policy to push equity markets, oil prices, and cyclically sensitive currencies higher and the more defensive US dollar and Japanese yen lower.

Cases of the omicron coronavirus variant skyrocketed across the US, UK, and EU late in the month, matching or exceeding worst-case expectations. In contrast, the expected impact of record case levels was at the better end of expectations, leading to some relief and omicron optimism late in the month. Cases in South Africa, the first country hit by omicron, exploded higher but peaked in early December after only a few weeks, then fell almost as rapidly as they rose while hospitalization and fatality data indicated that omicron is far less virulent than the delta variant. We are also seeing less severe illness and far fewer hospitalizations from early data in the UK, US, and EU. If the rest of the world follows the same pattern as South Africa, then lockdown measures are likely to be limited and case rates should fall back sharply by late January or February. In that scenario, the negative economic shock will dissipate quickly and do little damage to 2022 as a whole, and the outlook for risky assets will remain well supported.

Inflation continues to print at levels not seen in decades. In response, the US Federal Reserve (Fed), European Central Bank (ECB), and Bank of England announced tightening measures in December, though policy settings remain extremely accommodative in absolute terms. Yield curves generally rose across developed markets during the final week of the month. As we’ve pointed out in a number of monthly notes, higher rates in isolation are equity negative for risky assets, but higher rates alongside sufficiently improving growth expectations are positive. In December the improved omicron outlook was enough to offset the monetary tightening and rise in yields, resulting in a broad risk rally.

The balance between growth, inflation, and the monetary response to each will continue to be an outsize source of volatility as we head into Q1, and likely throughout the year. Central banks have an incredibly difficult task of combating generational highs in inflation without overreacting to temporary pandemic-related inflationary pressures and collapsing growth and asset prices. Our base case remains above-average 2022 growth after a rocky start to the year, with both growth and inflation rolling over toward longer-run averages later in 2022. This will allow central banks to moderate the pace of tightening and engineer a soft landing.

That said, there are substantial and rising risks to this outlook. Omicron may prove more disruptive than anticipated, particularly in zero-COVID policy countries such as China. Widespread lockdowns in China and partial lockdowns elsewhere may prolong inflationary pressures. The chronic inability of the Organization of the Petroleum Exporting Countries (OPEC) to meet increased production quotas, weak non-OPEC supply growth, and geopolitical risks could push oil and natural gas prices sharply higher. Thus far wages have lagged inflation in most major economies, resulting in lower real wages, which represent eroding consumer purchasing power. But it is entirely possible that wages accelerate higher over the next few months and contribute to a wage-price spiral. More persistent inflation and lower growth may force central banks to tighten more than they would like and precipitate a harder landing. Anticipation of these growth, inflation, and policy risks should at the very least contribute to greater financial market volatility in 2022.

Faced with this heightened near-term uncertainty, we are more cautious but still look for opportunities to position for our base case of above-average growth for 2022, resilient commodity prices, and increased differentiation in monetary policy. That translates into a bias toward buying undervalued commodity-sensitive currencies with central banks that are expected to raise rates in 2022 on dips: the Canadian dollar, Norwegian krone, and New Zealand dollar.

US Dollar (USD)

The US dollar lost 1.2% against the G-10 average in December. After a strong November rally in response to the hawkish Fed pivot and omicron news, USD spent most of December trading sideways in a tight range. After December 20, USD trended steadily lower as investors became more optimistic that omicron would be a temporary disruption and both equity and commodity markets surged.

Economic data showed a strong foundation to help the US weather any disruption from the omicron surge. Headline non-farm employment data was soft, +210,000 jobs compared with +550,000 expected, but the household employment survey was significantly stronger, sending the unemployment rate down to 4.2% vs. 4.5% expected. CPI inflation rose to 6.8% y/y, the highest level since 1982. One negative was disappointing November retail sales, though rising consumer sentiment and the healthy employment data suggest that the consumer is likely to bounce back. The generally positive economic backdrop had little impact on the elevated USD, as it had already priced strong growth and omicron risks.

The Fed did not disappoint expectations after its hawkish pivot in November. At its December 15 meeting the Fed doubled the pace of quantitative easing (QE) tapering to $30 billion per month, removed the word “transitory” in its description of inflation, and increased the projected rate path to three hikes in 2022 from just one in its September forecast. Like the strong economic data, this hawkish Fed move was mostly anticipated by the market and had little impact on USD, which had already rallied after Fed Chair Jerome Powell’s November comments.

We are negative USD for 2022 but concede that the backdrop remains supportive at least over the next one to two months. Continued high inflation should bias US yields higher as investors worry that the Fed may be forced to tighten faster and further than they’d like. Risk of rapid monetary tightening plus the potential for further omicron uncertainty will most likely keep equity markets on the volatile side. Volatile equity markets and higher US yields make for a strong USD environment.

Beyond the next couple of months, the outlook is not nearly as positive. The market consensus is for a stronger USD in 2022, and much of that optimism is already priced into the USD, which is near its cycle highs. In contrast, we expect inflation to begin to roll over after Q1, and relative growth outside the US is likely to improve as omicron passes. Over the next couple of months investors may be biased to worry about a rate hike as soon as March, the start of quantitative tightening, and perhaps a higher terminal rate. But if inflation and growth begin to normalize toward lower long-term trends, investor worry may quickly shift to focus on risk of a more dovish Fed, while improving growth outside the US and cheaper valuation in many markets outside the US are likely to entice capital to flow out of USD assets.

The main risk to this view is that inflation remains higher for longer due to some combination of rapid H1 2022 wage increases, longer-than-expected supply chain disruptions from omicron, and a spike in oil prices. In that case, the Fed may indeed move faster than expected and the market may begin to price in a higher terminal rate; currently the market is pricing a terminal Fed funds rate slightly above 1.5%, where the Fed expectations suggest 2.5%. If the market begins to expect more restrictive policy, it could move its terminal rate expectation above 2% and drive equities lower. USD would benefit from both higher yields and the flight to quality bid alongside falling equities, much like what we saw in late November. A flat to inverted yield curve would be a strong indication that the market expects the Fed to tighten to overly restrictive levels.

We may be USD negative for 2022, but we expect a historically mild USD bear market. It is hard to deny the pillars of the US exceptionalism thesis. Many factors support a structurally stronger USD over the next several years. The US potential growth and monetary policy/interest rate outlooks remain attractive relative to much of the world. US demographics are healthier than in most developed countries and the US remains well positioned to lead in a global economy driven by innovation and the development of intellectual property, while we may see some technology-enabled re-shoring of manufacturing. We respect these positive long-run factors and think that they will most likely result in the mildest USD bear market since currencies were floated in the early 1970s. Whereas the USD typically moves 15–20% below fair value at the trough of a bear market, we think USD falls back ony to and maybe slightly through fair value in this cycle. However, that still implies a broad 12–15% fall in USD from current levels.

Euro (EUR)

The euro traded in a range from -0.3% to +0.4% vs. the G-10 average for most of the month but fell to the bottom end of that range to finish down 0.2%. EUR fluctuations within its trading range were mostly driven by global risk sentiment. Daily euro returns were -53% correlated to the daily returns of the S&P 500 equity index. Most notably, the sell-off in EUR to the bottom of its range after December 20 coincided with the strong rally in equity markets and cyclically sensitive currencies.

Local European news had some impact as well. On December 16 we got both an ECB meeting and preliminary eurozone Purchasing Managers Index (PMI) data for December. The ECB provided a slight positive surprise. Markets had expected a formal announcement of the end of the pandemic emergency purchase program (PEPP) in Q1 2022 offset by an increase in their regular asset purchase program (APP). The end of the PEPP was announced as expected, but the APP program was increased only from €20 billion to €40 billion per month, which was below expectations. Compared to tightening by many banks across G-10 and emerging market (EM) countries this was a very minor surprise, but it was marginally positive for EUR. December PMI data softened slightly, but this was generally seen as positive given the downside risks from the wave of delta variant infections in November and rapid acceleration in omicron cases during December. EUR bounced between the 16th and the 20th following the ECB and PMI news, but even here some of the EUR strength was most likely attributed to the sell-off in equity markets during that period — a likely byproduct of the potential negative impacts of the Fed’s decision to double the pace of tapering and raise rates more aggressively in 2022.

Against the broader G-10 we remain bearish EUR over both the tactical and strategic horizon. All three of our long-term signals — valuation, interest rate carry, and long-term growth — suggest a short EUR position. EUR is quite expensive compared with GBP, NOK, SEK, CAD, and JPY and only fairly valued vs. USD, AUD, and NZD. The EU is trapped in a negative interest rate regime and hindered by an anemic potential growth outlook, which is a function of low productivity growth and poor demographics. That is not a good backdrop for currency strength. One bright spot over recent months was the ongoing recovery as the EU economies reopened, but the recent COVID-19 surge and resultant lockdowns will surely dim that recovery over the short term.

While our central case is negative EUR against the G-10, we recognize the risk that EUR could defy bearish market expectations and surge vs. the US dollar at some point later in 2022. Low interest rates relative to tightening Fed expectations and increased political risk in Italy and France are a drag on EURUSD for now, but a rising USD on higher rate expectations creates room for the Fed to ultimately disappoint, given our view that US growth and inflation will begin to normalize lower in H2. We also expect to see a steadier rotation toward cheaper cyclical sectors of the equity market. This favors some rotation out of US equities into European equities once omicron fades. Such a rotation would help to push EUR higher vs. USD. We saw this during late 2020 and think it may well resume as we get closer to a sustained post-pandemic recovery. To put a number to it, we could see EURUSD up toward 1.20 or a touch higher at some point in 2022, though in such a case it is still likely to underperform cheaper, more cyclical high yielding currencies.

British Pound (GBP)

After some weakness at the start of the month, the pound trended higher to finish as the third best performing G-10 currency in December, +1.2% vs. the G-10 average. Strong labor markets and a near 30-year high in core inflation prompted the Bank of England to raise rates by 15 basis points at its December 16 meeting. The dramatic increase in COVID-19 cases during this omicron wave will almost certainly slow the economy, but the UK government has been resolute that it will not return to widespread lockdowns. Indications from South Africa that the peak in omicron may happen quickly suggest that the economic impact will be temporary. And the higher-than-expected November retail sales, high PMI surveys, and strong employment situation provide a good base for the UK to weather the impacts of the COVID wave. That’s not to say everything is perfect. We did see some weakness in October industrial production and October GDP data that were released on December 10. Still, the economic situation was strong enough to justify tighter monetary policy and support GBP.

We retain a long GBP position due to its cheap long-run valuation and continued above-average growth. Growth has decelerated since its reopening surge earlier this year, but consensus growth estimates remain near 7% for 2021 and 4.8% for 2022, both significantly above long-run averages. The above-average UK growth along with likely continuation of monetary tightening and the pound’s significant discount to our estimates of long-run fair value are sufficient to justify a long position even if omicron dents near-term growth.

For strategic investors/hedgers, we encourage long GBP positions and/or higher-than-average hedge ratios on most foreign currencies. The long-term GBP story is positive in our view. The currency is cheap to fair value, and there is plenty of upside in terms of growth, inflation, and monetary policy expectations once we more fully emerge from the pandemic. In addition, we see the potential for capital flows into the lagging UK equity market, which may further help to accelerate GBP gains. With a long horizon it is better to ensure that you are in the market with a positive GBP position once the recovery takes hold and GBP reverts to fair value. The pound’s gains in Q1 2021 were a good example of the need for long-term, strategic investors to look through short-term uncertainty.

Japanese Yen (JPY)

The yen fell 2.6% against the G-10 average in December, the worst performance in the group. JPY continues to be driven by external factors such as global yields, growth expectations, and risk sentiment. Reduced fears of lasting negative impacts from omicron and tighter than expected policy moves by the Fed, Bank of England, and ECB contributed to a strong risk rally and higher global yields after December 20; low holiday liquidity most likely helped amplify this move as well. After trading in a tight range for most of the month, JPY stuck to its usual script and fell steadily during the late-month global risk rally.

Aside from JPY being very cheap to long-run fair value, generally well supported equity markets and tighter relative monetary policy outside Japan should keep the yen on the weak side to start 2022. We favor long JPY only due to its diversification properties during adverse shocks. That potential diversification is likely to be more beneficial over coming quarters than it was in 2021, as we expect greater volatility in risky assets during this period of ongoing COVID fears and tighter fiscal and monetary policy. However, we may have to wait until we see a peak in Fed policy tightening expectations before JPY can sustain a rally. In past cycles that has often happened after the first or second Fed rate hike. One interesting thing to watch for, albeit with very low probability, would be some rhetorical pushback against JPY weakness from policymakers. Japan has been trying to generate inflation for decades, but inflation via high import costs is not helpful. Acknowledgement of that fact by government officials may help limit the weaker JPY trend.

Over the longer-term horizon, we have a more positive yen view. The yen is quite cheap to long-run fair value relative to most G-10 currencies except for NOK, SEK, and GBP. This suggests that long-run forces are tilted toward a stronger JPY. Projecting ahead into late 2022 and 2023, the business cycle is more likely to support gains in JPY. We may be in the early to middle stages of global recovery, but by late 2022 investors will turn their attention to the reversion of global growth back to sub-par long-run averages. In fact, depending on the drag from high global debt levels, the potential misallocation of capital due to ultra-easy policy, and the degree to which governments efficiently allocate fiscal spending, global long-run potential growth may even be lower than the already weak level prior to the pandemic. That late 2022–early 2023 period of a mature and decelerating expansion is more consistent with outright yen appreciation given its cheap valuation.

Canadian Dollar (CAD)

The Canadian dollar gained 0.4% vs. the G-10 average in December to finish 2021 as the top performer in the group, with a 5.5% gain for the year. CAD began the month on a strong note as oil rebounded from its November low and employment data impressed. Canada generated 153,700 net new jobs compared with 37,500 expected, and the unemployment rate fell to 6.0% vs. 6.6% expected. Manufacturing PMI for November ticked down slightly from 57.7 in October to 57.2, but still signifies a strong expansion. The positive data impulse supporting CAD at the start of the month turned negative after the Bank of Canada (BoC) pushed back on market expectations of a Q1 rate hike at its meeting on December 8. Instead, the BoC indicated a first hike in the middle quarters of 2022. CAD trended lower for more than a week after the announcement before finding a base and popping back into positive territory on December 31.

From a risk adjusted standpoint, long CAD remains a stable and conservative way to position for the continued medium-term global recovery from COVID. Omicron is sure to slow growth over the near term, but strong employment, manufacturing PMI, and retail sales heading into this latest wave of the pandemic provide a good foundation to withstand that stress. The BoC is very likely to follow through with its projected policy tightening in 2022, which we expect to support CAD along with our projection of higher oil prices. Other cyclically sensitive currencies such as AUD and NOK do not appear as attractive on a risk adjusted basis. Australia is likely to be weighed down by ongoing weakness in Chinese growth and significant risk that the Reserve Bank of Australia (RBA) disappoints markets by keeping the policy rate at 0.1% for the year. Arguably NOK looks more attractive than CAD as the Norges Bank raises rates and oil rises, but it is riskier given its sensitivity to equity market weakness and USD strength, as we saw with its nearly 4% sell-off in November.

Longer term, the story is mixed. CAD is slightly expensive vs. the G-10 average. However, that average valuation measure masks major differences across currencies. CAD is cheap vs. USD, AUD, and EUR and extremely cheap vs. CHF, while it is expensive vs. JPY, GBP, NOK, and SEK. Therefore, we recommend that Canada-based currency hedgers adopt above-average hedge ratios on USD, AUD, CHF, and EUR and lower-than-average hedge ratios on JPY, GBP, NOK, and SEK.

Swiss Franc (CHF)

The franc gained 0.3% vs. the G-10 average in largely sideways trade during December and finished Q4 up 2.8%, posting positive returns in each month. CHF tends to be sensitive to global risk sentiment and particularly sensitive to EU growth and political risks, hence the strong rally in November after the omicron news. However, the bounce in global risk sentiment during late December failed to weaken CHF. It appears that CHF remains well supported by the shaky short-term EU growth outlook as omicron cases skyrocket and by the weak pace of Swiss National Bank (SNB) intervention, which has not been enough to fully offset CHF demand. The SNB continues to flag the franc’s very expensive valuation but may be a bit more tolerant of strength to offset rising import costs.

We remain negative CHF over both tactical and strategic horizons. That said, we see ongoing risk to the tactical view. We may need to see global inflation ease and omicron begin to decline in the EU before CHF begins to weaken toward fair value. Political risks in France and Italy over the next several months also have the potential to delay CHF weakness.

Our strategic negative view is driven almost entirely by the franc’s extreme overvaluation and ultra-low yields. By our estimates, CHF is more than 20% expensive to its long-run fair value vs. an MSCI World currency XCHF basket. In addition to expensive valuation, low inflation, ongoing CHF selling by the SNB, and ultra-low interest rates point to franc depreciation. As domestic and EU growth recover from the pandemic, capital outflows are likely to accelerate as Swiss investors look for higher return opportunities, much like they did during the 2017 EU growth spurt. Such flows are a likely catalyst for sustained franc weakness, though the EU recovery process has clearly been delayed by ongoing waves of new COVID-19 cases and omicron.

Norwegian Krone (NOK)

The krone was up 2.2% in December vs. the G-10 average, a retracement of more than half its 3.8% loss in November. NOK largely followed oil prices during the month. The rapid rebound in oil prices during the first week of December saw NOK rally nearly 2% against the G-10 average. As prices stabilized and corrected lower from December 8 through December 10, so did NOK. That pullback reversed and oil prices rose alongside equity markets after the 20th to finish the month near their highs. The krone followed suit, closing the month at its highs. Domestic data was also generally supportive. November manufacturing PMI jumped to 63.7 from 58.5 in October, much better than market expectations of 58.0. The regional network survey released on December 7 further highlighted a broad recovery, though it noted that supply chain constraints and the worsening pandemic may slow growth over the next quarter. The Norges Bank raised the policy rate to 0.5% as expected on December 17, noting continued recovery in the economy but also noting the near-term headwinds from the recent omicron surge. Most importantly, it maintained its projection for a gradual policy tightening cycle through 2022–2023.

We retain a positive view on NOK over both the tactical and strategic horizons justified by cheap valuations, strong growth supported by strong oil prices after we work through the current COVID surge, and a continued gradual tightening of monetary policy. As we point out each month, a long NOK position is not without interim volatility risk due to its lower liquidity and historically high sensitivity to equity markets. It broke that pattern of high equity sensitivity in September, but certainly reasserted itself with the dramatic sell-off in late November. The krone’s higher volatility and high beta to global risk sentiment will continue to limit our enthusiasm. Over the strategic horizon, we can look through those short-term volatility risks and focus more on long-run valuation. By our estimates, NOK is now close to 28% cheap relative to the currency exposures in MSCI World xNOK. We recommend that Norway-based investors set strategic hedge ratios on foreign currency at a high level while most foreign investors leave NOK almost completely unhedged.

Swedish Krona (SEK)

The krona had a tough month, losing 1% against the G-10 average following a 2% loss in November. Rising omicron cases in Sweden and the EU, its largest trading partner, has weighed heavily on the currency. However, the improvement in the omicron outlook later in the month did little to help SEK as rising global yields offset that better omicron outlook to keep SEK depressed. The Riksbank’s zero rate policy relative to steadily rising rates in the US, UK, Norway, Canada, and Australia has been a significant headwind for SEK through the year. Growth has been impressive, with November retail sales jumping 0.9% vs. 0.4% the prior month and composite PMI ticking higher to 67.2 from 67 in October. But with unemployment at 7.5%, compared to the pre-pandemic level of 6%, there appears to be plenty of capacity for further growth without significant inflation pressure. That is evident in November core CPIF inflation, which came in at only 1.9% despite strong global inflation and this year’s SEK weakness. There is little pressure for monetary tightening in Sweden.

Near-term fundamentals are mixed given the lack of a catalyst for monetary tightening and likely drag from broader EU growth due to the current surge in COVID-19 cases. However, recent weakness appears excessive even given those near-term headwinds. After the November– December sell-off of SEK, our short-term value model suggests room for a modest rebound. Over the medium term we see more room for upside. We expect that the recent COVID surge and likely omicron impact will prove to be a temporary setback in the global pandemic recovery. Sweden and its important trading partners in the EU have ample room to grow as COVID fades, which should help support the krona, especially vs. low yielding, less cyclically sensitive currencies such as EUR, CHF, JPY, and even USD given our expectation for USD strength to reverse later in 2022.

Over the strategic horizon, SEK is extremely cheap to our estimates of long-run fair value, nearly 39% cheap relative to an MSCI World xSEK basket of currencies. On this long-run basis, we see ample upside potential for strong SEK appreciation and recommend that SEK-based investors adopt high hedge ratios on most foreign currencies. Conversely, we suggest foreign investors adopt low hedge ratios on SEK investments.

Australian Dollar (AUD)

The Australian dollar finished up 1.3% in December and 1.28% for Q4 vs. the G-10 average. AUD began the month lower as the late November omicron sell-off persisted through the first few days of December. From there the strong rebound in commodity and equity markets lifted cyclical currencies such as AUD over the next week. The Reserve Bank of Australia met on December 7 and maintained QE bond purchases at AU$4 billion/week. It also left the policy rate unchanged at its record low of 0.10% and tied the rate outlook more explicitly to wage growth. Wages are picking up after the economy reopened in late Q3 but are still far from the sustained 3–4% growth rate that the RBA would like to see. The market was not surprised by the continued dovish tone on rates. However, RBA Governor Philip Lowe’s comments that the omicron variant was unlikely to derail the recovery were taken positively and helped sustain AUD gains. The currency appreciation persisted through mid-month as daily COVID-19 case rates remained low and November employment data surprised to the upside. Australia created 366,000 new jobs in November, 166,000 above expectations, and the unemployment rate fell to 4.6% compared with 5.05% at the end of 2019 before the pandemic. As risk sentiment improved through the final week of the month, the AUD rally ran out of steam. AUD maintained its month-to-date gains but moved sideways after December 23 despite the continued rise in commodity and equity markets. During that final week the seven-day average of new COVID-19 cases jumped six-fold, which may have caused some hesitation on the part of investors to chase AUD higher, given the country’s history of strict lockdowns.

We see significant headwinds to further AUD appreciation. Australia is still enjoying a strong economic recovery from the Q3 COVID lockdowns and investors are accordingly pricing in three RBA rate hikes despite the cautious tone from the RBA. That rosy growth and monetary policy outlook appears to be at serious risk. At this point the government appears committed to avoiding further lockdowns, but unlike the US, UK, and EU, Australia has yet to experience dramatic levels of COVID-19. At the current trajectory, we could see omicron cases 40–50 times higher than anything Australia experienced in the past. At worst, there is a risk that the government blinks and reinstates lockdowns. At best, the disruptions from such high levels of cases and the strain on the health-care system will slow the recovery. The RBA forecast of no rate hikes in 2022 or early 2023 is now more likely to prove true and will disappoint investor expectations of three hikes. AUD is also more sensitive to Chinese growth than other G-10 commodity-linked currencies. China’s zero-tolerance COVID policy in the face of omicron may lead to widespread lockdowns and greatly complicate the country’s attempts to revive growth via targeted monetary and fiscal stimulus. This also introduces greater downside risk for the AUD.

Our strategic view is mixed. By our estimates, AUD is now 6.6% cheap to fair value relative to an MSCI World xAU basket of currencies, about half of March 2020’s 16.9% undervaluation. However, this average measure of valuation differs quite a lot across individual currencies. We recommend that long-term Australia investors maintain higher-than-average hedge ratios on foreign investments against the USD and fully hedge CHF positions. We estimate an AUDUSD long-term fair value of 0.8074, 11.05% above current levels; reversion to fair value would result in a substantial drag on unhedged US assets for Australian investors. More broadly, we recommend that Australia investors leave positions in the cheaper GBP, CAD, JPY, and the Scandinavian currencies mostly unhedged; AUD is rather expensive relative to these currencies.

New Zealand Dollar (NZD)

NZD lost 0.3% relative to the G-10 average in December. The currency trended lower through the first three weeks of the month, ultimately losing 1.0% before bouncing back December 21–22 alongside global equities and commodity prices. New Zealand remains near full employment and the Reserve Bank of New Zealand continues to gradually raise interest rates. However, BusinessNZ manufacturing PMI for November slowed to 50.6 from 54.3 in October, showing that the initial reopening surge from Q3 lockdowns is losing steam. Omicron also complicates the outlook. With a vaccination rate over 90%, the country is well positioned to avoid severe lockdowns and mass fatalities from omicron and cases have yet to surge higher from omicron as they have in neighboring Australia. But the risk of a massive surge, further delays in reopening borders, and downside risks to Chinese growth may slow New Zealand growth and the expected pace of monetary tightening. We remain neutral NZD as its economy decelerates and faces these new omicron-related risks.

For long-term strategic hedgers, we suggest a maximum hedge ratio on CHF and a slightly higher than average USD hedge ratio. Oppositely, NZD remains quite expensive vs. NOK, SEK, GBP, and JPY based on our estimates of fair value. We recommend New Zealand-based currency hedgers maintain very low hedge ratios against NOK, SEK, GBP, and JPY. We are near neutral vs. AUD and EUR.

Figure 1
December 2021 Currency Return vs. G-10 Average