The current economic situation is both fast-moving and unpredictable. 2022 has already proved to be one of the most volatile periods in recent memory. With conflict in Eastern Europe, rising interest rates, inflation, and the threat of de-globalisation around the world, our buy side members came together at our FX Residential Meeting, where they were joined by MN Investment Management, Amundi, UBP and Ostrum Asset Management to assess macro-economic developments and the potential impact this will have for FX leaders.
One of the major areas tackled by our panel touched on the fact that de-globalisation is more visible in the world today as nations become more introverted and focused on self-interests, leading to global supply chains disruption and rising inflation. Our panel posited that due to this shift, and a variety of other external factors we may finally start to see a move away from the dollar as the primary global settlement currency.
There are certainly potential benefits as the world de-globalises for regional powers to circumvent the dollar and pursue more bi-lateral lines when dealing with their neighbours. One major factor in our experts thinking was the potential knock-on effects from the freezing of Russian reserves by the FED and ECB in light of the Ukraine invasion.
The freezing of Russian reserves was a major step to take. Our panellists argued it may spark a move for some nations to hold reserves in alternate currencies as the Dollar and Euro are no longer seen as sufficiently diversified, with a renewed interest in Gold as a stable reserve. It was noted however, that if this shift were to occur that it would be a slow transition and would be many years in the making.
A second focus area for our panellists was the impact of inflation and disruption of global supply chains. Central banks in the west are already having to catch up with the curve as we have moved into a supply strained economy.
If de-globalisation persists and supply chains become more vertical than they are currently with the relocation of factories away from cheap labour markets such as China, prices will continue to rise, and central bank inflation targets will hit and remain higher than 2% moving forward. Our panellists argued this could lead to realignment in exchange rates and have a large impact on the FX market.
Some of this supply demand imbalance is caused directly by the regime shift in global geopolitics that has been taking place over the past 20 years as the balance of power shifts toward China and away from the US. Oil prices are seen as a particularly good indicator of this shift and imbalance, with the US having sanctioned some of the largest oil producers in the world. Sanctions are easy to impose – but have proven to be next to impossible to unwind leading to a massive disparity in supply and demand.
China is also an innovative nation, strong both economically and politically and willing to flex their muscles on the global stage. It remains to be seen how this will culminate – but if it’s the US versus China, Europe should start to question where they fit into the equation.