Economic Outlook: OFX’s currency exchange and market forecast

We are now well into 2023, but is your money prepared for this year’s fluctuating markets? As interest rates increase and the energy crisis powers on, some say that a recession is not far off in our future. But, how will that affect you and your money?  Let our OFXperts help you plan for market variations, a possible recession, fluctuating currency exchange rates, and so much more. Find OFX’s treasury expert’s economic insights below.

Inflation, spending, and leaving COVID-19 behind.

Over the last year we have watched as the US dollar has inflated and interest rates have grown. Throughout 2023 we anticipate seeing the dollar decelerate, likely reaching pre-COVID levels of 94-98 DXY, as the effects of the COVID-19 lockdowns begin to recede into the past. Although the dollar might continue to decline, inflation may not make it back to the Fed’s 2% threshold. This is largely due to a shift in demand from the goods side of the ledger to services, meaning a reduction in overall price pressures in the US. While price pressures in the US don’t seem to be on the rise presently, the discrepancy in wage growth versus inflation over the last year may create friction in the US economy. We sat down with one of our FX treasury analysts to chat about everything from recessions and interest rates, to the effect that the political landscape can have on foreign exchange in order to get a pulse check on what may be coming in the market.

Is a recession in the cards?

The natural next question, is a recession in the cards? That all depends on who you ask. According to a Bloomberg survey published In December of 2022, there is a 70% chance of a recession by the end of 2023. The difference between this possible recession and recessions of the past is this recession has been forecasted for some time. While there is no way to say for sure that a recession will be upon us this year, most economists agree that an economic contraction is in the cards.

What did OFX Treasury have to say?

Q: There is a lot of debate right now as to whether the US will enter a recession, what do you think the market has in store for us this year?

A: “A hard landing (e.g., recession) or soft landing (e.g., avoiding recession) will have an important implication on the value of the US dollar and all the US dollar crosses. Recently, market participants are pricing an optimistic scenario (e.g., risk-on scenario, which makes the US dollar fall and the stock market increase). This is a soft-landing scenario. The main reason for this sentiment is their expectations of peaking inflation and interest rates. Therefore, the US dollar might be peaking as well. This would prompt the Fed to pause increases in the Fed rate cycle. Furthermore, market participants expect that the Fed might start to revert some rate increases by the end of 2023. The probability of a US soft landing keeps increasing, with inflation numbers in line with expectations.” – OFX Treasury Dealer, Isaac Figueroa.

Politics, interest rates, and the downturn of the dollar.

When a recession is on the horizon, it often makes sense to look at the factors that lead us here in an effort to prepare and anticipate further volatility in the market throughout the year. There are many contributing factors that lead to a recession, including political dissonance and rising interest rates. 

One of the biggest factor may be the geopolitical turmoil surrounding the Russian conflict in Ukraine. With the US stepping in opposition to Russia and renewing the idea of partnerships in the west, it has also created further dissonance with the other side of the world. Not only worsening the relationship with Russia, but also the relationship between America and China. This separation between two of the world’s largest economic powerhouses, the US and China, has resulted in a slowdown of trade and a major dip in the economy. This piggybacking on the period of China’s zero-COVID policy means months to year-long dips in the traditional trade pattern between the US and China. 

The other side of the coin shows the Fed’s efforts to slow down inflation by raising interest rates. While we have seen this accomplish its goal of slowing inflation, it also has the adverse effects of leading to a possible recession. This happens because as interest rates rise, it also reduces the demand for goods and services which then could lead to companies freezing hiring and/or large-scale layoffs. When these two factors are paired together, the likelihood of a recession in the next year rises, as well as the anticipation of a downturn in the USD. 

What did OFX Treasury have to say?

Q: What will be the biggest causes of market volatility and a possible recession?

A: “The answer is never clear, but a recession in 2023 or 2024 will likely trigger currency market volatility in 2023. The financial markets always move months ahead of economic data. Therefore, the next year may be more volatile than most. The current complacency on inflation might have more room for risk scenarios. In 2022, the increase in the value of the dollar until the end of Q3 can be attributed to three main factors:

  • The expectation of rising interest rates made the US dollar more profitable.
  • The eruption of war triggered a rush into the “safe asset” or US dollar as a global reserve currency.
  • A further demand boost from the high prices of many commodities.

Therefore, anything not included in the three bullet points above might be the most critical catalyst to move the currency market. As Heraclitus said, ‘If you do not expect the unexpected, you will not find it, for it is not to be reached by search or trail.’”-  OFX Treasury Dealer, Isaac Figueroa.

What does this mean for you?

Continued volatility like this gives you an opportunity to develop a risk management plan. Preparing for a recession or volatile market could involve budgeting, capitalizing on beneficial currency movements, or securing hedging strategies. Whether you are doing business around the world, buying products for your small business, or supporting your family in other countries, understanding market volatility and how to utilize risk mitigation tools is key.

Recessions create currency volatility, as many people search for the right moves and safe space for their money. While volatility on the surface seems like a bad space for foreign currency exchange, it can also create a lot of opportunities for great exchange rates. Understanding the exchange space and having an OFXpert on your team means that a recession can be profitable too. Our team helps you to understand the risks of the currency trading space while always trying to help you make the best trade for your needs.

Some great OFX tools to use  in a volatile market include: 

Forward Contracts- If the current exchange rate isn’t ideal for your company, work with an OFXpert to create a forward contract that identifies a time period in the future that makes sense for your exchange needs. 

Currency Outlook- Our weekly and monthly currency outlook compiles our treasury expert’s outlook in combination with key currency shifts and global news to lay out a comprehensive look into projected currency fluctuations.

Risk Calculator- Have you ever experienced exchange rates shifting between the time you receive an invoice and its due date? Use our risk calculator to determine the impact shifting market exchange rates could have on an example invoice. This is not a quote, it’s designed to help you understand the impact of currency fluctuations.

Rate Alerts- Stay on top of moving markets with OFX rate alerts. Get personalized market rate alerts direct to your inbox. If you don’t have time to be your own currency strategist, our rate alert option allows you to set a target market rate and our currency experts will monitor the ever-changing market for you.

24/7 OFXpert support- Talk to a real person any time of day or night. Our OFXperts are spread out around the world which means that no matter what time zone you are in, when you are looking for support, or what questions you have, we are always here to support you in a fluctuating market. 

Volatile markets can be intimidating and forecasting a market outlook is only an educated guess. The best way to prep for volatility is partnering with an OFXpert that knows you and your business, and can help you make the most of whatever the market brings. 

Navigate rate swings in turbulent times. Our OFXperts can help you make informed decisions about your global money transfers. Contact us.

IMPORTANT: The contents of this blog do not constitute financial advice and are provided for general information purposes only without taking into account the investment objectives, financial situation and particular needs of any particular person. UKForex Limited (trading as “OFX”) and its affiliates make no recommendation as to the merits of any financial strategy or product referred to in the blog. OFX makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this blog.