US Markets

What Happened to Forex Majors in 2021

For instance, a strong US dollar steamrolled everything in the developing world. But factors that significantly affected the behavior of individual currencies go beyond Covid. To get a full picture of forex major’s performance we shall look at each currency solely.

Let’s start with the biggest and most used currency in the world, the US dollar.

The US Dollar (USD) Performance

The USD recorded its best performance in 2021 in over five years. In December, the dollar index was up 7% supported by an improving US economy. A hawkish run by the FED due to persistent inflation also contributed to the growth. The fed is set to raise interest rates by March 2022, quite earlier than most economies. The Canadian dollar, which has recorded the highest growth against the USD, is set to raise the interest rates as early as January. In November the Dollar index hit the highest point since July 2020.

How EURO Faired in 2021

The Euro was quite strong in 2021, especially against the sterling. However, it lost some value towards the year and weakened against other major currencies. In November, a currency pair EUR/USD that is often regarded as the most stable currency pair in the world recorded a 2.6% dip in a month and a 7.8% year to date dip against the US dollar. This loss of value was occasioned by a resurgence in the covid 19 cases, political uncertainty and ECB divergence from other central banks.

As infection increases, eurozone countries such as the Netherlands and Germany reimplemented covid containment measures which raised concerns of the growth recovery. ECB dovishness also contributed significantly to the Euro weakness.

At the same time, the euro was affected by dwindling trade. For example, the total trade surplus fell to 7 billion in September of 2021 from 24 billion Euros in September 2020. In 2021, the euro recorded as much as 1% loss indicating the biggest percentage daily loss for over 12 months while the US dollar enjoyed as much as 1% daily gain for a similar period.

The Japanese Yen

The Japanese yen recorded the worst performance against the US dollar. In 2021, the Yen experienced a massive loss of value falling to a four-year low with the downtrend increasing after September. The Yen weakness saw the USD/JPY trade at around 155 level. The massive loss of value was occasioned by a strong dollar growth caused by inflation concerns and a high US treasury yield.

The Bank of Japan has taken measures to force the pair down. However, policy divergence between the Bank of Japan and the Federal Reserve will become more pronounced if BOJ retains the -0.1% rate. Remember, the federal reserve is planning to raise the interest rates in early 2022. The central bank is relying on ultra-loose monetary policy.

Initially, a weak Yen was seen as a blessing in disguise in the export-dominated Japanese economy. However, as it dropped to low levels last seen in 2017, it became a concern since the effects of importing raw materials were felt in the household’s purchasing power.

But the dwindling value has been ongoing for quite a while. According to Reuters, the Yen has lost about 50% against the US dollar in the last decade which has seen the price of brand name items such as smartphones and luxury watches increase. The price of new model iPhones has tripled over the same period while salaries have reached more or less the same.

Governor Haruhiko Kuroda said that the impact on exports and corporate profits of Japanese company subsidiaries is positive. Japan recently elected a new prime minister Fumio Kishida who has laid down a new economic policy that seeks to redistribute wealth fairly, arguing that the previous regime Abenomics has only made the rich richer. He also has a university endowment fund worth 10 trillion yen.

What’s more, Japan depends on imported energy which is getting costlier every day. There are chances the yen could continue to weaken in 2022 with Covid fueling the case. The planned increase of interest rates and Japanese CB retaining the interest rate has seen more traders shorting the Yen.

The Great Britain Pound

In March and early June, the pound against dollar increased to all-time highs of $1.40 against the US Dollar before falling to lows of $1.30. The last time the pound was weak the UK was contemplating Brexit. But that is now behind us.

The currency took a beating after prime minister Boris Johnson announced the wave of omicron overwhelming the health system towards the end of 2021. The UK pound was enjoying an upbeat moment during the beginning of 2021, as the country finalized Brexit in December 2020. A swift vaccination plan boosted the currency value.

But as other countries worked on their vaccination efforts, the UK was faced with a new set of challenges including the rise in inflation coupled with supply chain crisis a surge of covid cases. In December the central bank of England increased the interest rates by 1.25% taking the pound to a year low making the country the first G7 country to increase rates.

After the finalization of Brexit on the eve of Christmas England was caught in a third lockdown. This damped investor confidence as the country pushed new measures to prevent spread and death cases. The country accelerated the vaccination program bringing a feeling of optimism. The success of the program saw the sterling rise to $1.40 the highest since April 2018 as BOE ruled out possibly raising interest rates.

The safety issues of the vaccine did not dampen the mood. In fact, reopening the shop and restaurants pushed the currency to three-year highs. With massive stimulus programs and holding, interest rates at low the pound seemed unstoppable.

The delta variant dented the celebratory mood as it became clear the global recovery would derail. The investor turned to a safe haven like the dollar. Despite the concerns of rising inflation, BoE increased the interest rates by 0.1% in November defying expectations. Another restriction plan in December nailed the last nail in the pound dropping to the lowest in 2021. In fact, the bank voted to increase the rates by 0.25%.

The pound weakness could continue as investors are observing a brewing political instability after members of the cabinet including the prime minister were accused of flaunting the covid rules during the Christmas celebrations. Also, there are tensions after Brexit concerning the Northern Ireland protocol. The talks between Britain and the EU as a transition period nears could help GBP regain some value.

The Swiss Franc

As the coronavirus waves were causing devastation in other states, the Franc was gaining strength. Investors worried about the recovery of the global economy turned to the franc, a traditionally considered safe-haven asset. Although some analysts argued that the strengthening of the franc had an invisible hand of the Swiss National Bank (SNB), the strengthening of the currency against common currencies was boosted by the supply chain crisis and shortage of raw materials, and rising inflation. In fact, it was moving in lockstep with the US Dollar.

This explained why the currency jumped to a high level against the Japanese yen since 2015. It is considered a good hedge thanks to the central bank policy and less exposure to pressures of prevailing prices. The Swiss National Bank has a strict inflation mandate to strengthen the franc against imported inflation. The Central Bank currency intervention in the spot market is a strong resistance pillar. Experts argue SNB bought in the past which explains its strong resilience against the dollar. While CHF is a safe haven and rises during a bearish market it weakened against the yen, pound, and US dollar in November.

The Australian Dollar (Aussie)

The Aussie was largely bearish in 2021. It rebounded after touching a year-to-date low in August and went on to outperform most major currencies in October. However, the price tumbled after the price of iron ore, its major export experienced headwinds. The weakening was aggravated by a surge in dollar value, reserved bank delay in tapering its asset purchases, widening spread of the 10-year bond, and slow down in Chinese economic activities.

Iron ore Australia’s main export to China fell 14% in one day in November due to the closure of steel mills. The fall of AUD was also contributed by the bounce of USD as the market anticipated that the Fed could start a pullback policy in 2021.

Essentially, the Australian dollar weakness against the New Zealand dollar, US dollar, and the pound in 2021 was largely due to commodity price and interest rates. The Australian reserve bank kept the rates at 0.1% while interest rates were rising in other countries. AUD tends to follow commodities’ rise and fall. When Iron ore price increases due to Chinese demand at the beginning of the year, the AUD rises significantly. Commodity prices fell in the second half with AUD also tumbling. But Aussie has recovered well in 2022.

Final Words

2021 saw many economies open up after 2020 lockdowns and restrictions. However, numerous factors saw different currencies react differently. While each country was hit by the covid pandemic, the US dollar showed resilience performing better than major currencies. Ordinarily, a stronger dollar would see it rise against other pairs, other factors held constant. Some currencies, like the euro and yen, actually dipped to the low levels seen several years ago. The good news is that weak currencies are rebounding after the central bank’s intervention. But this does not inhibit the continued growth of the dollar. Let’s wait and see what 2022 has in store for traders.

This article was originally posted on FX Empire

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