Macroeconomic forecasts for 2023: exchange rate volatility remains high, global economy on the brink of recession

In the study assessing the foreign exchange market for 2023, iBanFirst provides a macroeconomic overview for the coming year and the potential impact that the evolution of the main currencies could have on Romanian companies that process international payments and should adopt a policy of hedging against currency risk.

iBanFirst experts argue that we are in an unprecedented situation, rarely has a recession been forecast so far in advance. Several economies are on the verge of collapse: the eurozone, the UK, and countries where the housing bubble has inflated significantly in recent years, such as Canada and Australia. On the other hand, the US could avoid a recession if the real estate sector, which accounts for 5% of US economic growth, does not falter in the coming period. The momentary drop in prices reflects a market adjustment, but not a market collapse.

China will not be a growth driver in the coming year. According to iBanFirst forecasts, China’s growth rate is expected to slow significantly in 2023 to around 3%. The Chinese government’s goal is to adjust the economy, which is currently being penalized by the zero-Covid strategy and the heavy-handedness of the real estate market restructuring that began in September 2021. Investors anticipate a total loss of $130 billion generated by Chinese developers’ default.

A strong dollar in a volatile currency market

For the currency market, the prospect of recession means a return to volatile conditions as well as a depreciation of the US dollar. According to iBanFirst experts, the US dollar is overvalued against most currencies. For example, it is about 28% overvalued against the euro when measured at the real exchange rate.

Although some analysts talk about the possibility of further coordinated intervention in the currency market by the major developed countries, as was the case with the Plaza Accord in 1985, this remains hypothetical in the short term. We are still a long way from the overvalued levels of that time, so we are more likely to see individual central bank interventions to limit the depreciation of their national currencies.

According to iBanFirst forecasts, the euro/dollar exchange rate will trend upwards during 2023, starting from a threshold of $0.90/euro in the first quarter to $1.05/euro at 6 months and reaching a peak of $1.08/euro by the end of the year.

„In the coming year, international companies will continue to operate in a highly volatile business environment and are exposed to currency risks. In order to maintain their competitiveness in foreign markets, they need to anticipate market fluctuations, develop medium and long-term forecasting scenarios and consider implementing a hedging strategy. Our team of forex specialists comes to import-export companies with the necessary know-how and customised hedging tools to help them overcome the challenges they may face in operating cross-border transactions”, says Alin Latu, Country Manager iBanFirst Romania.

Evolution of the leu against the euro

Predictions for the coming year regarding the evolution of the leu are slightly pessimistic. The exchange rate for 2023 will be influenced by several major factors, the main factor being the level of inflation. As we see a reduction in inflation, the leu will weaken against the European currency. We consider the recent appreciation of the leu as transitory, directly influenced by foreign investors’ inflows in government securities denominated in lei, but also by the strict liquidity management practiced by the National Bank of Romania”, Alin Latu added.

iBanFirst expects the national currency to depreciate against the euro over the next year. Thus, the expected average exchange rate for the 6-month horizon is 4.95 – 4.98 lei per euro, while for the 12-month horizon it is 5.03 – 5.05 lei per euro.

2023euroexchange rate volatilityforecastsforeign exchange marketglobal economyiBanFirstleurecessionstudyUS dollar
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