It’s one thing when central banks raise rates aggressively, and it’s another when they slow down. Each time has its favorites. Previously, the American and Canadian dollars were the best performers. What about the next few months? Let us discuss the Forex outlook and make up a trading plan for GBPCAD and GBPNZD.
Quarterly pound fundamental forecast
Nothing lasts forever. Slower rate hikes in Australia and Canada than expected and signals of a dovish turn by the ECB were the first signs that the cycle of coordinated monetary restriction is coming to an end. The rates ceiling is close, and there should be a pause or a very slow monetary tightening after it is reached. Traders should clearly see what currencies are good to bet on and how to act in the changing market situation.
In order to correctly predict the future, one should look into the past. Central banks in 2022 are acting in sync, being led by the Fed. However, the most aggressive monetary tightening has so far been marked not by the US central bank, but by the Bank of Canada. The BoC has raised its overnight rate by 350 basis points to 3.75%. As a result, the CAD has been the second best-performing currency among G10 since the beginning of the year. In contrast, the Bank of Japan did not budge at all, and the Riksbank increased its borrowing costs by only 175 basis points to 1.75%. The yen sank 28%, and the Swedish krona has been down by 22%. These currencies are clear outsiders.
Pace of monetary tightening by central banks overseeing G10 currencies
Source: Reuters.
Perhaps only the Swiss franc falls out of the general rule, being the third best performer of the year among the G10 currencies. The CHF surge may result from the unexpected SNB’s abandonment of its ultra-easy monetary policy. In addition, the members of the Swiss National Bank rarely meet together, only four times a year, and the franc is strengthening as a safe haven on the eve of a recession. The global economy has been on the verge of recession in recent times.
What’s next? Much depends on the so-called potential ceiling on the rates and how long it will take to reach it.
Dynamics of central banks’ rates from beginning till end of cycle
Source: Reuters.
According to the consensus forecast of Reuters experts, the federal funds rate will be the highest at the end of the coordinated monetary restriction. However, the Bank of England will have to go the farthest way. Canada and New Zealand are the closest to the end of the monetary tightening cycle, which was acknowledged by Tiff Macklem at the last BoC meeting.
Of course, the estimated ceiling, in fact, may be higher. At the same time, this is true for most central banks issuing G10 currencies, so the October forecasts of Reuters experts could be the general reference.
In my opinion, the bet on the British pound is justified. Too much negative has been priced in the pound pairs, including the deep recession in the UK and its current account deficit. Conversely, the Canadian and New Zealand dollars could become outsiders on the horizon of 3-6 months,
Quarterly trading plan for GBPCAD and GBPNZD
So, based on the idea of a soon end of the coordinated monetary tightening cycle, it makes sense to buy the GBPCAD and GBPNZD with targets at 1.59 and 1.62 for the first pair and 1.99 and 2.01 for the second one.
Price chart of GBPCAD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
