The forex market was both volatile and strong in 2021. After crashing to a multi-year low in 2020, the US dollar staged a major comeback in 2021, rising by 7% from January to November. The British pound declined by about 2% in 2021, which was a relatively solid performance. This happened since the UK economy did well in 2021. In this article, we will look at some of the top currencies to stay away from in 2022.
Turkish lira
Turkey is one of the biggest emerging market economies. It has a GDP of more than $780 billion and a population of over 84 million people.
The Turkish economy has done relatively well in the past few months, helped by the rising demand for its products.
However, the Turkish lira has continued its freefall against the US dollar. In 2021, it dropped by more than 70% against the US dollar. It fell by an equal measure against other currencies like the euro and sterling.
This decline happened because of the erratic decisions by Erdogan, the country’s president. In March, he fired a popular central bank governor who was working to stabilize the currency. He replaced him with a little-known economist and blogger who shares his unorthodox views about inflation.
In October, after the bank made its first interest rate cut, the president fired three central bank officials. The press reported that the three had opposed rate cuts. In total, the Central Bank of the Republic of Turkey (CBRT) slashed interest rates by three times. This is unorthodox since central banks usually start tightening when inflation is rising.
There are three main reasons why you should avoid the Turkish lira in 2022. First, the country’s central bank will likely continue with interest rate cuts in 2022 since 2023 will be an election year. The president has already promised that rates will go down.
Second, the Turkish lira devaluation should happen at a time when the Federal Reserve, European Central Bank (ECB), and the Bank of England (BOE) are expected to keep tightening. Therefore, this will lead to a wider divergence between these central banks and the CBRT. Finally, the country’s inflation will keep growing in 2022, which will put pressure on the lira.
Above, you can see the performance of the lira against three majors.
Russian ruble
The Russian ruble was quite volatile in 2021. The currency jumped to 69.5 against the US dollar by November. It then started falling. The currency was supported by the higher crude oil and natural gas prices. Since Russia is one of the biggest oil and natural gas exporters, it benefited substantially from these higher prices.
Still, there are signs that the Russian ruble will have a more difficult time in 2022. For one, it is still unclear whether the prices of oil and natural gas will keep rising in 2022. For natural gas, there is a likelihood that the Nordstream 2 pipeline will start delivering gas to Germany, which will help to lower prices.
The biggest risk for the Russian ruble will be Ukraine. In the past few weeks, the US has warned that Russia was attempting to invade Ukraine. That’s because the country has increasingly sent thousands of troops and equipment near its border.
In case of an invasion, we believe that the US and Europe will respond swiftly and ramp up sanctions. This, in turn, will affect the country’s economy. Recently, the US and Russia have announced a series of sanctions as well.
In the image above, you can see the performance of the ruble against USD and GBP.
Brazilian real
The Brazilian real rose sharply against the US dollar. It soared to a high of 4.92 between January and July. Since then, however, the Brazilian real has lost about 15% of its value, mostly because of the strong US dollar. The Brazilian central bank has been one of the most aggressive central banks, having raised rates by about four times.
There are several reasons why you should avoid the Brazilian real in 2022. First, I suspect that most emerging market currencies will struggle in 2022 as the Federal Reserve implements a tightening policy. This will include ending its quantitative easing program and rate hikes.
Second, Brazil will go to an election in October 2022. The key contenders will be Jair Bolsonaro, Sergio Moro, and former president Lula. In most cases, the currencies of countries going through an election tend to struggle.
Hong Kong dollar
The Hong Kong dollar declined modestly against the US dollar. It declined from a high of 7.75 to a low of 7.80.
Fundamentally, we believe that the Hong Kong economy will do well in 2022. For one, we expect that the city will not have the violence we witnessed in 2019. We also see the demand for the Hong Kong dollar rising as many mainland companies chose the city. Didi has already said that it will delist from the United States to Hong Kong.
The Hong Kong dollar should be avoided because of how it is structured. Unlike most currencies that are free-floating, the country’s currency is pegged against the US dollar. This means that the pair cannot move lower than 7.75 and higher than 7.85. The city has done this in order to make it more predictable for investors.
When it moves below the range, the city responds quickly by either buying or selling more HKD. Therefore, for investors and traders, we believe that it does not make sense to hold the HKD since the move potential is very limited.
The chart above portrays the USDHKD channel that’s maintained artificially.
Final thoughts
2022 will likely be the year of major currencies like the US dollar, euro, and British pound since their respective central banks will start tightening. Other key currencies that will do well are Nordics like the Norwegian krone and Swedish krona. These actions could drag emerging market currencies that have significant dollar debt. As such, currencies like the South African rand, Mexico peso, and Singapore dollar should be avoided.
