Which are the two themes that will shape the FX markets’ path in 2022? – Month in Review: January 2022
Macroeconomic Environment Review
Currency markets have been on a rollercoaster ride since the start of the year, primarily affected by two major themes: rising global growth optimism and a more hawkish Fed. In our opinion, the key question is not what theme will prevail but how they will affect each other and any outcome can lead to very different exchange rate dynamics.
By the middle of January, the US Dollar Index was down nearly 1% before stabilizing temporarily. Following the Fed meeting, the Dollar Index rallied nearly 2% only to fall back again to where it started the year. The best performer among major currencies so far this year is the JPY, up nearly 1%. The worst performers are the AUD and the SEK, both down nearly 2%. The pattern is similar in emerging markets, but with more upside surprises. The best performers are the BRL (+5.6%) and the ZAR (+3.8%). The worst performer, no surprise, is the TKY (-2.0%, failure to hike interest rates) followed by the RUB (-1.7%, Ukraine conflict).
The up and down pattern reflects the two competing themes in FX markets:
– The first theme is rising global growth optimism. Omicron is spreading like a wildfire but proving less virulent. Hopes are rising that Omicron is transforming Corona from a pandemic to an endemic. Global growth optimism is typically associated with USD underperformance.
– The second theme is the accelerated advent of Fed tightening. Fed chair Powell stressed in the press conference following the last FOMC meeting that this time is different. The economy and the labor market are much stronger and inflation is much higher compared to the last Fed tightening cycle. This implies a rate lift-off in March and possibly consecutive rate hikes in 2022 as well as a start of the balance sheet reduction in the second half of this year.
As a final note, we’d like to stress that these two themes are not necessarily mutually exclusive, meaning that each theme can materialize in some form without the other necessarily disappearing, hence caution is required.
Monthly Performance Review
During the month of January 2022, AENAON Syncro Strategies generated the following total returns net of fees:
Across the spectrum of our benchmark indices, our strategies’ performance during January was strongly positive. As a comparison, the US S&P 500 equities index lost -5.26%, the Barclay Hedge Fund Index posted a -2.45% decline, the Barclay CTA Index added 0.75% while the other benchmark indices can be seen on the chart below.
Chart 1: Monthly Performance vs. Benchmark Indices – January 2022
Charts 2, 3 and 4: Inception to Date Performance vs. Benchmark Indices
You can always review our updated factsheets at the following Fundpeak links, with monthly performance updates and statistics since inception: