2022 kicks off as global markets continue to focus on a year of economic recovery with optimism in growth momentum across sectors to lift off from Q1 and even more aggressively in the latter half.  Ongoing concerns of isolated Omicron outbreaks weighting against historical high inflation rates set the tone at the starting line of the year. As US treasury yields reaches a two-year high, further confirmations on rising inflationary readings through Consumer/Producer Price Index and Retail Sales will likely prompt the already “hawkish” Fed into an aggressive rate hike cycle. Major banks such as Goldman Sachs have since forecasted quarterly hikes through 2022, with the first to come from the next FOMC meeting scheduled for March. Early labour market data from the U.S. points toward growth, with lower unemployment rate but still underwhelming in the creation of new jobs. Recently re-appointed Fed Chair Jerome Powell has also stated that the "bottlenecks and supply constraints have been more significant and longer-lasting than anticipated."

The overall market consensus to the shift in monetary policy from a pandemic-driven low-interest and low-yield quantitative easing stance to aggressive rate hikes and accelerated tapering of government bond-buying programmes is that the guaranteed growth across global markets will certainly be volatility.

USD Index 2020 - 2022

For currencies, US dollar remains the king of the G7 pack since its accelerated rebound particularly through Q4 of last year. Driving factors point to the pace of US economic recovery with increasing inflationary pressure prompting imminent monetary policy shift. In addition, shifting policies surrounding the pandemic such as relaxing of travel restrictions and shortened self-isolation periods return investor confidence in the face of continual peaking infection rates (U.S. infections double in a week). Similar policy shift has been adopted by counties including the U.K. while some Asia and European counties are reconsidering further tightening of restrictions in the rise of Omicron. Naturally, path of least resistance leads to the global reserve currency, the mighty US Dollar. Lastly, on the US politics calendar, the November Midterm Elections may apply further upward pressure to the greenback to round the year off as President Biden’s Democratic party may push for further tax hikes and passing of their social spending bill to booster votes and approval ratings.

GBP/USD 2020 - 2022

The Pound Sterling (GBP) shares comparable sentiment of the Dollar strength drawing also from similar government policies toward pandemic restrictions in addition to the Bank of England already having one rate hike (15bps) under the belt to end 2021; with another even higher 25bps hike projected for Q1 2022.

EUR/USD 2020 - 2022

The European Central Bank’s (ECB) sustained loose and dovish approach strain on the Euro, starting the year at €1.13 against USD and once again, the word “parity” echoing across the media. While the Pandemic Emergency Purchase Programme (PEPP), at the historical price tag of 1.85 trillion euros ($2.19 trillion), ends in March 2020, ECB President Christine Lagarde maintains that the Asset Purchase Programme (APP), a monthly addition of 20 billion euros, will be ramped up as a bridge through to the end of the PEPP. Markets speculates the ECB to maintain its bond purchasing and stay in negative interest rate territory through to 2023.

USD/CNH 2020 - 2022

The Chines Yuan continues to set its course as the best performing major emerging market currency for the second consecutive year with its resilience to the USD. While other emerging markets (ASEAN) may face increasing pressure from servicing debts held in an increasing US dollar, surging export figures accelerate China’s economic recovery with total export goods from China to U.S. up 8.4% YoY between 2019 and 2022. The People’s Bank of China (PBOC) is anticipated to boost liquidity offerings ahead of the upcoming Chinese Lunar New Year.

The PBOC is also promoting their latest developed digital currency, the Digital Yuan (e-CNY) to be used for retail transactions as well as utility bill payments and other admin services. Over 140million Chinese residents have already opened a digital yuan account as of October2021. In time for Lunar New Year celebrations and upcoming Winter Olympics, plans of electronic cash lotteries and enabling access to foreign visitors without Chinese bank accounts are anticipated to further promote the new digital currency.

WTI (US Oil) 2020 - 2022

In the world of commodities, oil has already been speculated to return to triple-digits status after its stellar performance reaching a 6-year high above $80 per barrel before corrections to end 2021 near the $75 mark. A nearly 80% watermark since the start of last year can largely be attributed to its highest importer, China which imports a total of 557million tonnes per annual. China’s main oil suppliers include Saudi Arabia (85M tonnes), Russia (83M), Iraq (60M), South and Central America (72M) and West Africa (72M) and another 20million tonnes from the U.S. When oil price reached its troughs below $20/barrel as global demand dropped drastically due to Covid-19, China was able to buy the dip, building up a health national reserve to meet their high consumer and production demands.

A key factor to oil price for 2022 will largely rely on the continual growth in global demand recovery. OPEC suppliers have agreed under a pact with allies to limit production which sees oil back above $80 early into the trading year. Concerns over strict zero tolerance covid policies hindering the pace of demand recovery are equally weighted against the anticipation of a strong return in “pent-up” travel and consumer demands toward the second half of 2022. The pressure of increasing oil prices driving up inflation at an even faster pace plays a key role in the acceleration of the US Federal Reserve rate hike cycle. Lastly, tensions near the Ukraine-Russia border fit the narrative for the increase in oil price due to the geopolitical unrest.

XAU/USD (Gold Spot) 2020 - 2022

Gold, considered a safe haven asset over other growth-linked commodities, enjoyed a consolidation period through 2021, rallying from $1700 range to a high of $1900 in Q2 before settling around key price of $1800 to start the new year. The consolidation may continue throughout, at least, the first half of 2022 as a combination of rising inflation and raising of interest rates proves a challenge to mimic the prior year’s rally but may still excel as a hedging vehicle over other industrial metals and energy prices. While gold price no longer follows the textbook inverted correlation with rising yields in recent years, a flattening yield curve (particularly downward slopping towards inversion) could serve as an early indicator of impending recession and an early bullish signal for the commodity.

Copper 2020 - 2022

Copper also experienced a significant price rally at the start of 2021, from $8000 per tonne to over $10,400 all-time high before settling on the year around $9500. A surge in total world copper mine production growth is expected around 7% for 2022, from just 2% in 2021. The supply surge is also expected to be met by China’s accelerated factory activities, despite ongoing isolated covid outbreaks. Goldman Sachs remains bullish on this commodity, quoting that copper could be the “new oil” and maintains their firm view that commodity is still within its supercycle period.

Volatility is a trader’s best friend and there is certainly plenty on the horizon this year. Rely on a trusted partner to help you navigate through the peaks and troughs. Get in touch to see how we can help achieve your ultimate financial goals. Bullseye Financial is a leading wealth and asset manager. We offer investment management services to professional private and institutional clients to achieve a broad range of objectives through our highly tailored service. Backed by our team’s diverse expertise, extensive networks and resources, our clients choose us for our valued and trusted expertise, proven track record and personal service.

Author: Alexander Ng (Head of Marketing of Bullseye Financial Ltd)