The 2022 year is in the books and the final rankings of the strongest to the weakest of the major currencies is showing the USD as the strongest and the JPY as the weakest.
The central bank fundamentals drove both the USD and the JPY to their respective positions.
The Federal Reserve hiked rates the fastest and the most of all the major countries. Overall, the Federal Reserve hiked rates by 4.25% from 0.25% at the end of 2021 to 4.5% (high target) at the end of 2022.
The Bank of Japan did not hike once in 2022, choosing instead to maintain their steady rate policy in the face of a tick up in inflation. As a result, their currency was hit hard for most of the year with the USDJPY reaching the highest level going back to July 1990 at it’s peak on October 21, 2022.
At the high the USDJPY had move up 32.02% for the year. The last 2+ months did see the USDJPY pair correct more than 50% of the years trading range, with the USDJPY ending the year still up 13.91% but well off the highs.
Catalysts for the decline in the USDJPY (rise in the JPY) other than overbought technical conditions and some technical tilts including a break below the 100 and 200 day MAs, include:
- Softening of US inflation,
- More restrictive Fed policy which shifted the bias for the economy lower going into 2023 (at least from the market traders),
- Lower US stocks
The Bank of Japan did their part, by hiking the ceiling yield for the 10 year bond to 0.5% from 0.25% in December (a small but meaningful gesture and shift).
Overall, the respective central banks did the following in 2022:
- Federal Reserve +4.25%
- Bank of Canada, +4.00%
- Reserve Bank of New Zealand 3.25%
- Bank of England 3.25%
- Reserve Bank of Australia 3.00%
- ECB 2.5%
- SNB +1.75%
- Bank of Japan 0.0%
The next strongest currency behind the US was the CHF. Although the SNB raised rates by 1.75% – less than all but the Bank of Japan, they tended to benefit from safe haven flows in 2022 (and not being part of the EU or GBP). They had a bit of the best of the rest.
On the weak side, the next weakest of the majors was the GBP. The GBP suffered from the impact of the Ukraine War and its proximity to the EU nations (and trade reliance). They also suffered from political uncertainty with 3 separate PMs in 2022. Fiscal blunders from Liz Truss’s 40 or so day’s as Prime Minister also led to sharp selling in September.
The combination had investors shunning the pound.
The GBPUSD move to a low of 1.0352 on September 26th before retracing 61.8% into December helped by a settling of the government issues, and a calming from the anxiety from gas/oil. A weaker USD into year end also helped the GBPUSD recover.
The GBPUSD settled the year right around the 50% midpoint of the 2022 trading range at 1.20499. Nevertheless, the USD gained 10.7% vs the GBP in 2022.
The EUR was the next strongest behind the CHF despite the trouble from bordering Ukraine. A relatively mild winter and stockpiling of natural gas helped the EURUSD into year end. The ECB increased their hawkish tilt at the December meeting which has helped to keep the gains from the November run higher.
The AUD, CAD and the NZD had gains and losses vs the major currencies in 2022. Some ups and some downs vs the majors earns the distinction of being “mixed” in 2022.
Below are the gainers and the losers of the major pairs. NOTE if the USDJPY was up 13.91%, I simply inversed the JPYUSD for simplicity purposes.