What currencies to invest in for 2023?

The yen strength is based on a number of assumptions: tighter monetary policy from the BoJ, economic recovery in China, and no major escalation of the conflict in Ukraine.

>> New action from the Bank of Japan

The first is yen strength. This is based on a number of assumptions: tighter monetary policy from the BoJ, economic recovery in China, and no major escalation of the conflict in Ukraine. On the first of these, we’ve already seen that expectations of policy change have lifted the yen quite sharply, and the departure of BoJ Governor Kuroda in April should cause tightening expectations to rise still further.

The economic recovery in China should prop up sentiment in Asia and give the yen further support. The importance of the last factor, the conflict in Ukraine, comes about because Japan took a big hit in terms of trade last year as energy prices soared following Russia’s incursion into Ukraine almost a year ago. Adverse terms of trade shocks usually lead to currency weakness, in our view, and we saw this not just for the yen but also for other hefty energy importers, such as the UK and the euro zone.

If the more recent fall in energy prices sticks and these terms of trade-effects reverse, the yen should rise. We suspect that the scope for yen strength is probably greatest against the dollar, rather than those currencies that could see their own terms of trade boost, like the euro and pound. Our target is 120 for this year.

A second currency we’d pick out is the Australian dollar. Now, while the Aussie may suffer the flipside of the terms of trade effect if energy prices stay down, we think this will be more than compensated by the economic recovery in China and the thawing of political relations between China and Australia that seems to be gathering momentum.

Former Australian Prime Minister Scott Morrison antagonized Beijing shortly after the pandemic broke, calling for action to hold China accountable for allegedly being slow to alert the world to the pandemic's danger.Frostier relations hit Australian trade hard, on top of the weakness caused by China’s economic slowdown and its more recent "Covid-Zero" policy. But now that policy has gone, China should recover, and a thawing of relations between Beijing and the new Australian government implies a triple dose of positive factors for Australia.

As with the yen, we should find that the aussie rises against the US dollar this year, and we have a target of 0.75, which may prove too conservative. A long position against the NZ dollar may be even better as this cross rate has fallen hard in recent months and could see a sharp rebound, especially if, as we suspect, the economic slowdown is greater in NZ and the RBNZ is forced to give up on its aggressive rate-hike forecast.

>> Will the yen strengthen through 2023?

A third currency we’d pick out is the euro, particularly against the Swiss franc. As we’ve mentioned earlier, the euro could continue to benefit from a reversal of the terms of trade shock we saw last year. In addition, the ECB continues to sound somewhat hawkish about rate hikes, while we suspect that the SNB will reach peak rates quite soon.

The SNB has clearly stepped aside from intervention to weaken the franc, and while, it may seem that this is a good reason for franc strength, we actually feel that a "cleaner" euro/Swiss market that’s both free from intervention, and now seeing a rise in euro/Swiss, is more likely to see the franc’s fall persist. And finally, just like the other positions we have suggested, there is something of a "reversal" trade about the euro/Swiss.

This means that the euro/Swiss had fallen significantly in the 18 months leading up to last September.If a rebound is now in place, as we suspect, the upside could be substantial as the euro recovers past losses. We look for a rise to 1.05, but levels up to 1.10 are not out of the question, particularly if much of 2023 sees a risk-on mood amongst investors, as this will weigh on safe currencies like the Swiss franc.