Socgen overall notes market confidence that the global economy will stabilise during 2023. The bank notes optimism that the global coronavirus crisis is effectively over and that inflation can be brought down without economic devastation, both factors which will underpin the international economy. 
These factors will tend to underpin risk appetite and, according to Socgen; “A backdrop of soft economic landings, monetary policy pivots and a correction in energy prices (which have been very dollar-supportive) suggests the Dollar Index will reverse most if not all the gains it saw between January and September 2022, taking it back below 100 (from 107 currently).”
Socgen also expects that US fundamentals will be less supportive for the US dollar with the prospect of slower US growth and a less hawkish Federal Reserve stance set to reduced dollar support, especially with the US currency at very elevated levels in historic terms.
According to Socgen, the Euro is very cheap in valuation terms which could mean that it could recover quickly and strongly if there is a shift in sentiment.
The bank, however, is also still wary over the Euro fundamentals with a particular focus on the energy sector. Socgen expects that these structural problems will curtail the potential for Euro gains and makes a decisive turn in sentiment less likely.
It adds; “if the European sovereign crisis highlighted structural weakness in Europe’s finances, then the war in Ukraine highlighted dependence on Russian energy. It’s very hard to imagine EUR/USD getting back above 1.20 until energy supplies become resilient enough to restore confidence.
Yen Recovery on US Yield Decline
Socgen notes the importance of capital and investment flows for the Japanese currency; “Japan’s international investment position matters more for the yen than day-to-day fundamentals.”
A decline in US yields would tend to curb capital outflows from Japan which would also support the yen while a peak in US interest rates would increase the potential for Japanese investors to hedge their dollar exposures and potentially add to yen buying.
In this context, the bank notes that the yen could strengthen sharply once the tide turns against the US currency.
Overall, it has a dollar to yen (USD/JPY) exchange rate forecast of 125 for the end of 2023.
Socgen continues to note a lack of underlying confidence in the UK fundamentals which will be an important drag on the UK currency.
These weaknesses are, however, also well known which makes it difficult to assess how much bad news is priced in to the Pound.
The bank notes; Identifying the impact of UK-specific factors (terrible balance of payments, a worse growth/inflation trade-off, and a structural hit to potential growth, isn’t easy because none of that came as a big surprise to a bearish consensus.”
Overall, it expects that sentiment is negative and it does see scope for a limited Sterling rebound against the dollar if the UK economy performs close to current expectations.
It notes; “If the energy crisis doesn’t re- intensify and if the recession the UK already finds itself in doesn’t transpire to be significantly worse than expected, GBP/USD is more likely to see 1.30 in 2023 than 1.10.”
Its year-end GBP/USD forecast is 1.24.
Although there is the potential for a GBP/USD recovery, Socgen expects that underlying economic vulnerability will be a key element haunting the Pound against the Euro over the medium term.
According to the bank; “The threat then, is that the productivity hit from recent events will prove very hard to tackle in the medium term, let alone in the near term. For sterling, that poses the threat of longer-term vulnerability, with a gradual rise in EUR/GBP towards parity more likely than a gradual fall towards 0.70.”
Socgen expects that commodity currencies will post net gains during 2023, primarily under the influence of a weaker US dollar, although there are still important caveats.
The bank expects that the Canadian growth performance will remain relatively disappointing, especially given high debt levels, curbing currency support.
It also expects that the Reserve Bank of Australia decision to slow the pace of rate hikes will limit scope for Australian dollar gains, at least until the Federal Reserve cuts interest rates.
According to Socgen, the Norwegian central bank is likely to reach the peak of its tightening cycle relatively quickly which will limit krone appreciation while relative interest rates will sap support for the Swedish krona.
| Pair | spot | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 |
|---|---|---|---|---|---|
| EUR/USD | 1.05 | 1.06 | 1.10 | 1.12 | 1.12 |
| USD/JPY | 137 | 135 | 135 | 130 | 125 |
| GBP/USD | 1.22 | 1.20 | 1.24 | 1.24 | 1.24 |
| EUR/GBP | 0.86 | 0.88 | 0.89 | 0.90 | 0.90 |
| USD/CHF | 0.94 | 0.94 | 0.93 | 0.92 | 0.92 |
| AUD/USD | 0.68 | 0.68 | 0.70 | 0.72 | 0.74 |
| NZD/USD | 0.63 | 0.65 | 0.68 | 0.70 | 0.72 |
| USD/CAD | 1.34 | 1.35 | 1.34 | 1.33 | 1.31 |
| EUR/NOK | 10.35 | 10.20 | 10.00 | 9.80 | 9.70 |
| EUR/SEK | 10.90 | 10.80 | 10.60 | 10.40 | 10.30 |
| Dollar index | 105.2 | 104.5 | 101.6 | 99.7 | 99.0 |
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