The forex market, as a whole, entails buying and selling of currencies for profit. Selling a currency pair is referred to as going short. This is done when you expect a currency pair’s price to fall in the near future. Because currencies are quoted in pairs, shorting one pair entails selling it. You’ll be taking a short position on the base currency while going long on the quote if you do it this way.

If you short the GBPUSD pair, for example, you sell the pounds and purchase the dollar. This is in the expectation that the pound would depreciate versus the dollar, the pair will go bearish, allowing you to benefit from your short position. We’re going to look at the currency pairs that are going to be bearish in 2022 and their reasons.

EURUSD

EURUSD is one of the best pairs to short in 2022. It is predicted that the USD will be strong against the EUR. There are several reasons. One, the Fed cycle is undervalued. The Federal Reserve may raise interest rates next summer. Good economic momentum into 2022 (anticipated GDP at 5%), backed by healthy business and consumer balance sheets, should ensure that pricing power is maintained and inflation remains over 3% throughout the year. Tightening monetary conditions can be aided by a higher dollar.

Two, expectations of ECB tightening are being held under check. The ECB’s policy course was also affected by the oil price shock, with over 30 basis points of tightening priced in for 2022 at one point. That pricing appears to us to be severe and unrealistic, though it may require eurozone inflation plunging into next spring (helped by the German VAT boost rolling out of calculations) before the market abandons it. In 2022, the eurozone is anticipated to have a negative production gap of 0.5 percent of GDP. 

USDCAD

The pair is predicted to decline come 2022. This is because, in October, the Bank of Canada took a more hawkish posture by concluding QE and indicating that the first-rate rise would occur in 2Q22 or 3Q22. The first raise is expected at the March meeting, with a total tightening of 125 basis points in 2022. Expect only limited scope for a re-pricing of tightening expectations in 2022, as we currently forecast four 25-bp rate hikes. With the lowest volatility among commodity currencies, the Canadian dollar could become a popular carry bet against low-yielding assets next year. In the commodity FX market, we believe CAD has the lowest downside risk, and we estimate USDCAD to remain closer to 1.20 in 2022 rather than 1.25.

Another reason is the strong domestic economy in Canada. In Canada, the job market is back to pre-pandemic levels, record-high investments are boosting the economy, and a very effective immunization program is allowing the formerly tough border policy to be relaxed. When you consider that demand for Canadian exports from the United States is likely to continue to rise and that Trudeau’s government has promised to keep fiscal policy loose for longer, the domestic economic story is likely to remain positive for CAD, shielding it from any risk-off waves or USD appreciation.

In 2022, we predict oil to average 76 dollars per barrel (Brent), with a gradual return to surplus driving prices lower. The resurgence in the Canadian oil and gas industry, which is presently a significant engine of economic strength, should not be harmed by such a steady fall. As a highly open economy, Canada stands to profit from further global trade recovery, which might accelerate in 2H22 as supply constraints relax. Long-CAD should continue to be a proxy trade for the solid US growth story, as 70% of Canada’s exports go to the US.

EURGBP

The pair is likely to go bearish. This is because of politics for one. The FX options market has assigned a significant risk premium to the French elections in April, notably the April 24th run-off. At the moment, President Macron appears to be comfortably ahead in the polls, with approximately 25% of the vote, however, a lot may happen in the following four months. In early 2017, the euro was pushed down by the French elections. The Johnson government in the United Kingdom appears to be surviving most errors, and the opposition Labor Party has yet to launch a significant challenge. And we have a feeling that Chancellor Rishi Sunak is saving his powder for a pre-election tax giveaway in early 2023. As a result, the eurozone faces potentially bigger political dangers in 2022.

Secondly, inflation is expected to rise in the United Kingdom and the eurozone in the coming months. The Eurozone CPI is expected to peak in December at roughly 4.3 percent, but the UK highs aren’t expected until April and will be higher at 5%. Despite market expectations, an ECB rate rise next year appears improbable, and plentiful liquidity (pushing market rates near the deposit rate floor) is expected to last far into 2023. In the United Kingdom, the possibility of the Bank of England letting its Gilt assets roll off once the policy rate reaches 0.50 percent is fascinating. The rise in relative government bond rates should help the pound.

EURNOK

Being a significant energy exporter has already benefited NOK in recent months, but the favorable consequences for the Norwegian economy are expected to continue, as increased investments in the energy sector are projected to further strengthen the recovery. In 2022, we predict just a moderate decline in oil prices, which should partially offset the steeper drop in natural gas that we expect. It’s important to note that, unlike other exporters, Norway’s modest hydro reserves render it vulnerable to big increases in domestic energy costs.

The Norges Bank’s (NB) tightening intentions are believed that it will be supported by the growth and inflation outlooks, which now indicate three rises in 2022 beyond the previously announced boost in December. The market pricing closely resembles the NB’s most recent predictions. The odds are believed to be stacked against the central bank over-delivering (four rises in 2022); as mentioned above, there is a chance that the economy could overheat in early 2022, prompting the NB to expedite its tightening plans. Even if the policy rate is raised three times next year, a policy rate of 1.0 percent ensures that NOK would be among the first to profit from any revival of carry trade activity in the G10.

Conclusion

The best currencies to short in 2022, are the ones that are expected to go bearish. We looked at fundamental reasons why the pairs are predicted to decline. The pairs include EURUSD, USDCAD, EURGBP, and EURNOK.  One should do in-depth research before determining which currencies they should short.

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